GCC banks perform better in 2011

Banks in Gulf hydrocarbon producers appear to be heading for a better financial year as most of them reported higher profits in the first nine months of 2011 despite the continued slowdown in domestic credit.

Analysts said growth in the profitability in the banking sector in the six-nation Gulf Cooperation Council (GCC) was due to lower provisions, better services and commission income and high public spending because of strong oil prices.

“The main reason for the profit growth is the higher commission income by many banks, better services fees and the reduction in provisions for bad debts,” said Paul Gamble, head of research at the Riyadh-based Jadwa Investments.

He said that many banks in the oil-rich region were last year setting aside large sums of money to cover exposures to some large Saudi family companies that defaulted on debt and to companies that were hit by the generally weak economic environment of the previous few years.

“By the end of last year, provisions for bad debts in the GCC countries had reached a level that banks are comfortable with, so there was much less need to set aside new funds for this  purpose this year,” he told Emirates 24/7.

In the UAE, which controls the largest Arab banking system, most banks reported better performance, with major units in Abu Dhabi recording a whopping 37 per cent year-on-year rise in net income in the first nine months of 2011.

The surge was mainly due to a sharp rise in the profits of the government-controlled Abu Dhabi Commercial Bank (ADCB) which had suffered from losses in the previous period. From only Dhnine million in the first nine months of 2010, ADCB’s net earnings rocketed to Dh2.516 billion in the first nine months of 2011.

The rise boosted the combined net income of Abu Dhabi’s five banks to Dh10.487 billion from around dh7.6 billion in the same period.

The balance sheets of 15 national banks through the UAE also showed their net earnings leaped by around 26 per cent to Dh16.5 billion from Dh13.1 billion.

In Saudi Arabia, the largest Arab economy and the world’s top oil exporter, the consolidated net profits of the Gulf Kingdom’s 11 listed banks (excluding its largest bank, National Commercial Bank), swelled by about 17 per cent to SR19.57 billion in the first nine months of 2011 from SR16.73 billion in the first nine months of 2010, according to their balance sheets. But there was a decline of around five per cent in their net earnings in the third quarter.

All the banks made higher profits except SAMBA group, which recorded a drop of about 4.9 per cent in profitability due to lower special commission.

In a study last month, a Saudi investment firm expected banks in the Kingdom to perform better through 2011 as domestic economic conditions begin to improve and the banks have built up enough provisions against non performing loans.

Between the end of 2008 and end of 2010, non-performing loans of listed banks jumped by nearly SR10.2 billion or around 132 percent after being relatively stable over the previous five years, the Riyadh-based Jadwa Investments said.

It said massive provisions for credit losses have distorted the earnings of banks over the past three years following years of high earnings.

“We think that banks have now cleaned their loan portfolios and that the share prices of banks are generally well positioned for a healthy recovery this year….owing to improved economic conditions we think that the amount of new non-performing loans should fall significantly. Furthermore, it appears that bulk of the provisioning for the debt built up over the previous few years is complete.”

Like Saudi Arabia, UAE banks have also been locked up in a massive provisioning drive to offset the repercussions of the 2008 global fiscal distress and the 2009 regional debt default crisis.

The provisions soared by nearly Dh15 billion through 2009 and Dh12 billion through 2010 before they started to slowdown. Central Bank figures showed provisions by the country’s 51 banks stood at about Dhfive billion in the first nine months of 2011, indicating banks have started to cut such allocations.

Figures by the Washington-based Institute for International Finance showed Saudi Arabia has the highest ratio of provisions to non-performing loans (NPLs) in the region, standing at 115 per cent in August. The report put the ratio at 104 per cent in Oman, 95 per cent in Qatar, 76 per cent in the UAE, 70 per cent in Kuwait and around 60 per cent in Bahrain.

In Qatar, balance sheets showed banks in the world’s largest LNG exporter recorded a 21 per cent year-on-year rise in their net earnings to nearly QR11.3 billion in the first nine months of 2011.

Banks in Oman are projected to boost their net income by nearly 10 per cent through 2011 thanks to a gradually recovery in credit and other services.

"The Oman banking sector is resilient, strong and comfortable. Looking at profits of Q3, we will see upward growth of about 10 percent for 2011," central bank governor Hamood Sangour Al-Zadjali said.

Omani banks already recorded a seven per cent increase in their net profits in the first half of 2011 as they took advantage of high oil prices and better economic conditions to expand credit to the private sector.

Net earnings by the country’s commercial banks stood at RO119 million ($308 million) in the first six months of 2011, an increase of about seven per cent.

In Kuwait, analysts believe the banking sector has started to recover following a difficult period over the previous two years.

“The banking sector in Kuwait is recovering gradually with a significant improvement in bottom line figures while operating revenues remained stagnant mainly on the back of near-zero growth rates in loan portfolios and low business volume which impacted adversely the non-interest income (fees & commission),” said a report by KAMCO, a key investment firm in Kuwait.

“The marked improvement in Kuwaiti banks’ profitability and financial standings in 2010 and 1H-2011 are encouraging and signal that further rise in profits is eminent. However, credit growth has been flat since 2010 on the back of conservative lending policies of banks to the real estate and investment sectors in addition to subdued demand for credit.”

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