A few further comments onMoody’s warns of risk for Gulf banks.

The question raised is re a build-up of systemic risk in banks operating in the Arabian Gulf as a result of rapid loan growth and “possible asset bubbles”.

I don't watch Gulf banks myself, so I have not a clue as to whether the loan book growth (versus say direct asset exposure via private equity and similar holdings, or security market trading books) has been that large - and one wonders what character of lending - corporate, consumer.

But these are mere detials of curiosity about the detials of problems to come.

Some answers without going beyond thethe FT report are here:

the agency has not awarded ratings upgrades yet because of high exposure, both indirect and direct, to volatile capital markets, as well as to “certain pockets of overvalued properties and the construction sector”.

There were also concerns about over-borrowing by consumers, with most banks experiencing an increase in loan balances of more than 25 per cent for the fourth year running.

Should read consumer loan balances I suppose.

In a way that is a pity, if it reads correctly, since one presumes that there is less than useful levels of corporate credit.

The equities market collapse attracts some attention as well:

“Moody’s maintains a cautious approach as we believe that the surge in economic and banking activity has also led to a build-up of new risks, which are largely systemic in nature,” said Mardig Haladjian, a general manager in Moody’s financial institutions group and author of the report.

The full impact of the collapse in Gulf stock markets – Saudi Arabia’s all shares Index has halved since February – may not become clear until the end of the year when loans begin to mature. Moody’s main concern was related to lending secured by equity holdings, more than direct bank exposure to markets.

“The speculative nature of trends, the huge volumes built up and the sometimes extremely high valuations of Gulf capital markets have led us to be particularly concerned about the possibility of the build-up of an asset bubble in the region,” the report said.

One should recall the prior article noting in KSA there was retail lending to buy equities.

I presume that portion was even "Islamically correct" - risk shared and all that.

Dangerous and as Moody's notes, structural threat.

More disturbing is this

It added that many of the banks were not able to quantify the extent to which their consumer, personal or corporate loans had been channelled to the capital markets. This made it difficult to calculate their full exposure to value deflation.

That tells you that there has been some very sloppy and loose lending (whatever its Halal status or not).

Further, some questions on the whacky prices in Dubai and the rest of the Emirates (mostly Dubai)

There were questions about the viability of property price rises in the United Arab Emirates. Property prices have also risen sharply in Kuwait as a result of the state’s role as a hub for rebuilding Iraq. “A possible reversal in real estate values could place some banks under financial strain,” the report says.

However, you can count this as falling on deaf ears unless Gulf regulators prove less stupid than I give them credit for.

Postscript, after posting I thought this should be linked with the FT article on the every more extreme search for return embodied in investing in African bonds Africa’s bond frontiers are not for the faint-hearted - and illustrated by their chart:

For all that I am a partisan of emerging markets as more eligible for investment than commonly given credit, the utter collapse of spreads between some markets and the US is madness

In the last two years the yields on “classic” emerging market instruments, such as those issued by Russia, Brazil and Turkey, have collapsed. Even the more exotic instruments have seen returns wither: in Egypt, for example, yields have shrivelled from 500 basis points over US treasuries at the end of 2002 to less than 100 basis points. “Most investors do not even consider Egypt to be exotic any more,” marvels Marc Pegona, head of emerging market trading at Citigroup in London. “It is quite a shift.”

As returns in Egypt have fallen, Citigroup has started dealing in assets from Botswana, Zambia, Tanzania, Kenya, Uganda, Ghana and Nigeria. It is examining even strife-torn Malawi. “We used to just look at one or two countries in Africa but now we cover 12,” says Mr Pegona.

Anyone paying only 100 bp over US treasuries for Egyptian paper is .... desperate to place their money.

At least Cote d'Ivoire paper - a country in the midst of civil war - has some spread....