Slow growth and provisions to stifle GCC banks

Gulf banks are expected to remain stagnant in 2010 as they remain under pressure from high loan loss provisions and poor lending activity amid relatively slow economic growth, according to analysts.

The general performance of banks in the six-nation Gulf Co-operation Council (GCC) in the first half of this year showed they would likely miss a major profit growth similar to that recorded in the two years that preceded the 2008 global fiscal crisis, when regional economies were galloping.

While some banks reported higher than expected earnings in the first half, the banking sector as a whole far lagged behind the boom years and was almost as dormant as in the first half of 2009, the analysts said.

“I would say that the GCC banks’ net profits should remain subdued this year, around the same numbers as last year given that economic growth is gradual not fast,” said John Sfakianakis, chief economist at Banque Saudi Fransi (BSF).

“At the same time bank lending in the pre-crisis period grew as very fast as a result of the real estate frenzy which has now disappeared. Corporate borrowing has also grinned to halt due to debt concerns. There is also differentiation in terms of growth of bank lending opportunities. Qatar has a small population compared to Saudi Arabia, hence retail banks can expand in the latter and very slowly in the former,” Sfakianakis told Emirates 24|7.

The net earnings of GCC banks dipped by around 8.5 per cent to nearly $14.39 billion in 2009 from about $15.74bn in 2008.

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.

As for the first half of 2010, the net income of 12 UAE banks listed on the bourse grew by nearly 2.2 per cent to Dh8.2bn despite large losses suffered by the government-controlled Abu Dhabi Commercial Bank, one of the largest banks.

Several banks reported lower earnings in the UAE but the decline was offset by a sharp rise in profits by key banks, including First Gulf Bank, the National Bank of Abu Dhabi, Union National Bank and Mashreq.

“The results of these banks are generally good but ADCB’s results had been expected given its heavy exposure to Dubai World,” said Fadi Kiswani of the Sharjah-based Alsharhan Securities, a key UAE stocks and investment firm.

“The banks’ net income could be higher but they are stifled by continued provisioning and the fact that their lending is still tight. Our expectations are that the sector’s performance this will be somewhat equivalent to 2009. I don’t see high profit growth as it is still a year of stagnation.”

In Saudi Arabia, which controls the second largest Arab banking sector after the UAE, heavy loan loss provisions kept pressure on its banks after years of strong performance and depressed their net profits by more than nine per cent in the second quarter of 2010, according to their balance sheets.

The reports showed their combined net earnings dipped by around 9.4 per cent to SR5.93 billion in the second quarter of 2010 from around SR6.54bn in the second quarter of 2009. The decline also depressed their half yearly profits by about 9.4 per cent to SR11.72bn from SR12.94bn.

The results do not include those of the kingdom’s largest bank, National Commercial Bank, which is noted listed on the stock market.

Citing banks’ financial statements, Alriyadh newspaper said Saudi banks allocated a record high of more than SR8.4bn for non-performing loans (NPL) in 2009 and nearly SR1.55bn in the first quarter of this year.

“Total earnings growth of the GCC banking sector came under considerable pressure owing to continuation of high provisions during the second quarter of 2010,” the Kuwait-based Global Investment House said in a study.

“Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in the first quarter, leading to a massive 48 per cent rise in the second quarter over the previous quarter.”

It said GCC banks are expected to show an increase in provisions in the coming quarters, related mostly to those trickling in from UAE.

“Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to exposure to Dubai World and related entities. Although ADCB, one of the most exposed banks to Dubai World and related entities, has already taken the hit in the second quarter of this year, other UAE banks are still to follow suit. Moreover, additional provisions are expected due to changes in the Central Bank’s regulations.”

In Qatar, banks reported a 17 per cent growth in their net income to around QR3.04bn in the first half of 2010. Their NPL provisions dipped to around QR32 million from QR92m in the first quarter.

In contrast, banks in Oman recorded a decline of about 5.9 per cent in their net profits to around RO121.3m in the first half of 2010 from nearly RO129m in the first half of 2009.

According to the Central Bank of Oman, the net income was down following taxes and loan loss provision taking.

The figures showed the banks’ performance was lower despite a 5.5 per cent growth in credit to around RO10.17bn in the same period.

According to GIH’s figures, key Kuwaiti banks listed on the bourse boosted their net income by nearly 34 per cent in the second quarter of 2010 compared with the second quarter of 2009. But growth stood at only about six per cent compared with the first quarter of 2010.

“Aggregate profit of the GCC banking sector posted a decline of five per cent in the second quarter of 2010 compared with the second quarter of 2009,” GIH said in its study, which covered nearly 40 of the more than 150 GCC banks.

Follow Emirates 24|7 on Google News.