Consolidation among the banks of the Gulf region has been very limited so far, but will be necessary in coming years, Standard & Poor’s Ratings Services says in a report, Gulf Banks Will Have To Consolidate To Meet Tomorrow’s Global Competition.

“This issue is not yet critical as retail banks’ business is still largely domestic,” says Standard & Poor’s credit analyst Anouar Hassoune, lead author of the report. “But it is more pressing for banks oriented toward the corporate sector and investment banking.”

These banks, which currently have a competitive advantage, will suffer from the expected surge in competition stemming from their countries’ membership in the World Trade Organization. Bahrain and Kuwait were the first Gulf countries to join in 1995; Saudi Arabia, now in negotiations with the WTO, will be the last.

If Gulf banks do not act to acquire other banks, or seek alliances or mergers, competition will first erode their franchise and ultimately their financial performance. Gulf banking systems therefore will need to consolidate, as size will increasingly matter.

Several factors are creating momentum for domestic and regional alliances. Gulf banks are: focusing on their region, rather than international expansion; facing increased competition from free trade regimes; needing to diversify and generate synergies and economies of scale.

“Standard & Poor’s has a positive view of such alliances, as it will help form stronger, more efficient, and diversified banks that can meet the financial needs of their own economies and face global competitive challenges,” Hassoune says.

Standard & Poor’s therefore believes a more competitive, open, and integrated banking landscape will be a positive development for the region.