Gulf banks will continue their steady recovery from the 2008 crisis and remain isolated from euro zone turmoil for the rest of 2012 and 2013, international ratings agency Standard and Poor's (S&P) said in a report yesterday.

"We believe the trend of declining loan loss provisions will continue for most of the banks in the GCC, resulting in further recovery in reported net profits despite adverse conditions in the euro zone and international banking markets," said S&P's credit analyst Timucin Engin.

Since the start of the global financial crisis in 2008 and despite slower balance sheet growth, most GCC banks have maintained healthy earnings generation before provisioning.

Even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses. This trend of better asset quality and lower loan loss provisions is fuelling the improvement in earnings at most Gulf banks.

S&P doesn't expect the euro zone turmoil to have a big direct impact on the GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable, the report said.

European banks have traditionally been fund providers in international credit markets and they are now contracting their overseas exposures as they are trying to preserve liquidity and capital in line with increasing regulatory requirements and the challenges in the euro zone.

"GCC banks' lending and investment exposures to the euro zone are also very limited and their high levels of capital are also a major strength, and provide an important cushion against unforeseen stress on asset quality," said S&P's credit analyst Paul-Henri Pruvost.

The outlook for lending growth in Kuwait and the UAE remains limited, but is healthy for Saudi Arabia, Qatar and Oman.

For most GCC banks, funding profiles have improved visibly in the past few years on the back of declining balance sheet growth, the report said.