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Fitch noted that international banking expansion offers increased diversification. By deploying capital in high-growth markets, Gulf banks may offset weaker growth opportunities in their local markets.
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The acquisition process in a region or country with a low credit rating that drains the capital of the acquiring Gulf bank can lead to a reduction in the financial viability rating, especially if there are no measures taken to restore capital.
Fitch credit rating agency indicated that Gulf banks acquiring banks in regions or countries with low credit ratings might face challenges due to a weak operating environment, along with compromised financial profiles and viability ratings.
In a recent report, the agency added that “several reports indicate that Gulf banks are looking to acquire banks in low-rated regions or countries in the Middle East and Central Asia. We believe that external growth through acquisitions forms part of Gulf banks’ strategies to diversify their business models and enhance profitability. By deploying capital in high-growth markets, these banks may offset weaker growth opportunities in their local markets.”
Additional risks
Fitch added, however, the primary exposure for Gulf banks outside the region is through their subsidiaries in Turkey and Egypt, where their total asset exposure exceeds $150 billion. While international banking expansion offers increased diversification, it also introduces additional risks, particularly concerning foreign exchange fluctuations and high interest rates in countries with low credit ratings and volatile economic conditions.
Fitch confirmed that international acquisitions by Gulf banks could impact their financial viability ratings in two ways, although the extent of this impact will depend on the relative size of the acquired foreign bank.
Negative effects
Fitch outlined two negative effects of a Gulf bank’s acquisition of a bank in a low-rated country as follows:
- The first way in which a Gulf bank’s acquisition of an international bank in a region or country with a low credit rating may affect it is through Fitch’s assessment of the bank’s comprehensive operating environment. The agency notes that the bank’s operating environment is a crucial factor in determining financial feasibility ratings, and it impacts both its commercial and financial profile.
- The second method involves a direct impact on the bank’s financial conditions. The acquisition process in a region or country with a low credit rating that drains the capital of the acquiring Gulf bank can lead to a reduction in the financial viability rating, especially if there are no measures taken to restore capital.
Government support
Fitch ruled out any long-term impact on the credit rating of issuers’ deficits due to Gulf banks’ acquisitions of international banks. This is because the credit ratings of most Gulf banks’ issuers’ deficits are primarily influenced by government support.
