Dubai: Banks in Gulf oil producers are now in a better position than banks in the West given their large liquidity levels, government support and lower loan loss provisions, a Saudi bank has said in its monthly bulletin.

After two years of slackening lending activity because of the 2008 global fiscal distress and regional debt default problems, banks in the six-nation Gulf Cooperation Council (GCC) are now gradually easing curbs on domestic credit and the trend could pick up through 2012, the Saudi American Bank Group (Samba) said.

"The GCC banking sector is generally sound and well managed and compares favourably when viewed against US and European banks," it said.

 "Banks in the GCC have been resilient in the face of recent global financial shocks and benefit from strong government support. Most hold capital in excess of statutory limits and are now highly liquid, bolstered by a healthy revival in deposit growth since the middle of 2010," it said.

 The report said the more than 150 banks in the 30-year-old Gulf Alliance have also started to benefit from falling loan loss provisions following an initial surge in impaired assets, reflecting in large part the crash in regional property prices, defaults at Saudi conglomerates, the Dubai debt issue and difficulties surrounding Kuwaiti investment companies.

GCC banks' access to international capital markets has improved, the cost of funding has declined and most banks have maintained their high levels of profitability, the report said.

The report showed that domestic credit grew by around 5-7 per cent in most GCC states in 2010, although it remained stalled at less than 1 per cent in the UAE and Kuwait.

In 2011, lending activity picked up, although the rate of growth has been held back by uncertainty caused by widespread unrest in the broader MENA region, accentuating risk aversion by both banks and investors.

The report said Bahrain was the worst hit, on account of civil unrest within its borders, but headwinds also came from still weak real estate markets, particularly in the UAE, which is still undertaking restructuring of its real estate loans.

"That said, we expect that the revival in corporate and consumer credit growth will strengthen in 2012 as GCC economies continue to benefit from high oil revenues and sustained public spending," Samba said.

(Agencies)