IMF sees rise in GCC banks' NPLs

Non-performing loans (NPLs) in Gulf banks have sharply increased since the eruption of the 2008 global fiscal distress and are projected to swell further although the banks remain in a strong position, according to the IMF.

Several years of boom business have allowed the banks in the six-nation Gulf Cooperation Council (GCC) to largely bolster their financial resources and this provided them with a strong cushion against the effects of the crisis, the Washington-based IMF said in a study on the GCC.

“GCC banks’ capital adequacy ratios remain strong and there are positive indications on profitability. The GCC financial systems entered the global crisis from a position of strength, with high capital adequacy and modest NPLs,” said the study, authored by a group of IMF experts.

“Despite the general increase in NPLs in 2009, the banks’ capital adequacy remains high, supported by injections of public funds in Qatar and the UAE and private capital in Kuwait and Saudi Arabia. Data for the first quarter of 2010 indicate only a small

year-on-year decline in profitability and a more than doubling of profits over the fourth quarter of 2009.”

The IMF said provisioning requirements were lowest compared to the last three quarters in 2009 but remain high compared to pre-crisis levels.

It said Kuwaiti banks continued to fare the worst in the region, with profits year-on-year declining by nearly nine percent.

“NPLs in GCC banks are expected to increase further in 2010, although potentially at lower rates than those experienced in 2009,” it said.

The International Monetary Fund gave no figures on GCC banks’ NPLs but according to a key Western financial centre, the NPL ratio in the more than 150 GCC banks has sharply grown over the past two years.

In the UAE, it leaped from around 2.5 per cent at the end of 2008 to 4.3 per cent at the end of 2009, showed the figures by the Washington-based Institute of International Finance (IIF), which groups several major Western banks.

NPLs to total loans in Saudi Arabia grew from 1.4 per cent to 3.5 per cent in the same period while it more than doubled from 3.1 per cent to 6.4 per cent in Kuwait.

It rose from 1.2 to two per cent in Qatar, from 2.3 to 6.2 per cent in Bahrain and from around 2.1 to 2.9 per cent in Oman.

“The short-term priority remains the buttressing of the financial sector without unduly constraining the availability of credit.

In the banking sector, this requires a continued forward-looking approach to monitoring bank capital adequacy through periodic reviews of bank asset quality and regular stress testing, including against tail risk,” the IMF said.

“To encourage banks to address emerging problems expeditiously, the authorities should ensure that a prompt corrective-action framework with well-specified criteria for intervention is in place.”

In its study, the IIF echoed IMF views that the GCC banking sector, which accounts for more than half the Arab banking system, remains sound despite a sharp drop in profitability due to high provisioning and low credit.

“Financial soundness indicators constructed from individual bank balance sheets aggregated on a country wide basis suggest that GCC banks remain well capitalised and profitable with system wide capital and liquidity cushions that helped them weather the global financial turmoil in 2009,” IIF said.

“This is largely due to solid economic performance in 2003-2008 that helped strengthen balance sheets, stronger regulation (Saudi Arabia and Oman), and high government participation in banks, ranging between 13 per cent in Kuwait and 52 per cent in the UAE…bank soundness indicators continue to exhibit stability across the GCC countries.”

Its figures showed the average capital adequacy ratio, defined as the ratio of capital to risk-weighted assets, was above 15 per cent for every banking system in the region. This is well above the eight per cent Basel II framework requirement and the local regulatory minimum ratio.

“Weighted average NPLs to total loans in the region have almost doubled, increasing from two per cent at the end of 2008 to nearly four at the end of 2009. While this ratio has remained relatively low by international standards, the ratio of banks’ provisions to potential losses associated with NPLs have declined significantly in Kuwait, Saudi Arabia, and the UAE,” it said.

“The profitability of the banking sectors have been affected in 2009 by the higher provisioning requirements related to the exposure to the two Saudi family affiliated conglomerates, some deterioration in corporate loan portfolios, and defaults in personal loan and credit card portfolios.”

Balance sheets of the GCC’s largest 63 banks showed their net earnings dipped to around $14.39 billion (Dh53.9 billion) last year from nearly $15.74 billion (Dh57.76 billon) in 2008, a decline of about 8.56 per cent.

Bahrain, the largest offshore banking centre in the Middle East, suffered from the biggest fall of around 35.2 per cent. In contrast, Kuwait’s banks recorded one of their largest increases in net income of around 70 per cent.

The combined net profits of UAE banks receded by around 19.18 per cent while there was a drop of 15.2 per cent in Oman, and 10.14 per cent in Saudi Arabia. Banks in Qatar reported a slight fall of just 0.1 per cent.

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