Arab bank lending returns after turbulent 2009

After basking in a fiscal euphoria for more than six years, Arab banks plunged into one of the most turbulent periods in their history through 2009, but are expected to regain their balance this year, according to regional banking data.

Lending was the main victim, plummeting by nearly 71 per cent last year as the coffers of some banks dried up because of the global credit tightness, and others were scared off by persistent debt default problems following the global economic crisis.

Banks in the UAE and neighbouring Gulf oil producers were hit hardest despite deposit growth and massive rescue plans announced by their governments, with most of them sharply tightening their lending belts and others becoming more selective in providing credit to the private sector.

From a record $186 billion (Dh683.16bn) in 2007, total loans extended by the Arab region's nearly 470 banks slumped to about $136bn in 2008, mainly because of a sharp fall in the fourth quarter in the aftermath of the global crisis.

Credit tumbled to only around $39bn in 2009 and a large part of it was provided by banks outside the oil-rich Gulf, according to data by the Beirut-based Union of Arab Banks (UAB), which groups most of the regional banks.

But financial analysts believe 2010 would be a turnaround for the banks as they have built up enough provisions and domestic demand is picking up, supported by a surge in oil prices and local economies. Banks in the UAE have already recorded an upturn in credit so far this year and experts see this as an indication of a return to normal activity.

"The increase in credit by the UAE banks in the past two months was noticeable… I am not saying the banks have completely abandoned their policy of credit tightness, but I can see a gradual and slow reversal of lending reservations and an easing in the banks' grip on provision of credit," said Humam Al Shamma, Financial Analyst at Abu Dhabi-based Al Fajer Securities. "I can tell you that 2010 will be a year of recovery in lending by the banks after they were severely hit by the global crisis and default problems."

Surge in consolidated credit

The UAB figures, sent to Emirates Business, showed the consolidated credit provided by Arab banks stood at around $644.6bn at the end of 2006. This surged to nearly $830.7bn at the end of 2007 and jumped by around 16.4 per cent to $966.5bn at the end of 2008. The loans grew by only around four per cent to nearly $1 trillion at the end of 2009, the report showed.

Credit in 2009 recorded one of its slowest growth rates in nearly two decades despite a surge in deposits to nearly $1.3trn at the end of 2009 from about $1.18trn at the end of 2008, an increase of around 0.1 per cent.

A breakdown showed banks in the six-nation Gulf Co-operation Council (GCC) were the main victims of poor lending operations through 2009, as they have higher exposure compared to other banks, to regional debt default problems.

In the UAE, which has the largest banking system in the Arab World, credit provided by its 24 national banks and 28 foreign units grew by around $7bn to $277bn at the end of 2009 from $270bn at the end of 2008. It had leaped by nearly $81bn in 2008 and $52bn in 2007.

Saudi Arabia's 12 commercial banks emerged to be adopting the strictest lending policies, as many of them have been heavily exposed to the default crisis involving the Saudi Saad and Algosaibi family businesses. Their lending to the public and private sectors recorded near zero growth, slipping by around $100 million to about $195.7bn at the end of 2009 from $195.8bn at the end of 2008. Credit has jumped by nearly $41bn through 2008 and around $25bn during 2007, according to UAB.

Kuwait was another victim, albeit to a lesser extent, with credit by its banks swelling by around $2bn to $87.5bn at the end of 2009 from $85.7bn at the end of 2008. In 2008, credit surged by more than $6bn, while it recorded its highest growth of $24bn through 2007.

The figures showed lending by Oman's banks growing by only around $1.1bn last year compared with nearly $7bn in 2008 and $3.6bn in 2007.

Qatar was an exception in the GCC, with credit by its banks surging by around $8bn last year. But growth was much lower than in 2008, when credit leaped by nearly $22bn after rising by about $16bn in 2007.

Outside the GCC, banks in Tunisia, Algeria, Egypt and Jordan suffered from a plunge in lending because of the crisis, while those in Syria, Libya and Morocco were not affected as credit by their banks recorded large increases. Loans by Syrian banks grew by nearly $2bn in 2009, while those in Morocco and Libya swelled by about $9bn and $11bn respectively.

Banks in the GCC and the other Arab countries enjoyed one of their best periods during 2001-2008 because of high oil prices before the situation was reversed by the global crisis that rocked the West and other nations in September 2008.

Oil prices soared to their highest average in current prices during 2007 and 2008 before crumbling by more than half in the fourth quarter of 2008.

The surge in prices allied with high oil output to boost the economies of GCC countries and other Arab nations to one of their highest levels. This allowed regional banks to lavish funds on projects and make record earnings.

In nominal terms, the combined Arab gross domestic product (GDP) leaped by a record 26.2 per cent to $1.89trn in 2008 from around $1.5trn in 2007. Gulf countries recorded the highest growth because of a sharp rise in their hydrocarbon sector and a surge in public spending to record high levels.

Figures by the Abu Dhabi-based Arab Monetary Fund (AMF), a key Arab League establishment, showed public expenditure by regional nations climbing to their highest ever level of around $565.8bn in 2008 from $464.3bn in 2007. The 2008 spending was more than double the 2003 expenditure of $228bn.

The figures showed Saudi Arabia, which sits atop more than 20 per cent of the world's proven oil wealth, accounting for nearly a quarter of the total Arab spend, pumping in nearly $138.6bn during 2008.

It was followed by Algeria, with spending of $66.2bn. Expenditure stood at around $52bn in the UAE, $51.2bn in Egypt, $34.9bn in Libya, $34.6bn in Kuwait and around $24.6bn in Qatar.

Improved prices to boost lending

The surge in the region's expenditure followed a sharp rise in oil revenues, which boosted total Arab earnings to a record high of $817.8bn in 2008, an increase of nearly 41 per cent over the 2007 earnings of nearly $578.5bn.

Saudi Arabia emerged as the biggest earner, with around $293bn. It was followed by the UAE with nearly $78.1bn and Kuwait with $67.9bn.

The AMF figures showed capital spending in the Arab World also surged to its highest level of around $486.2bn in 2008 and the bulk of the investments were pumped in by Saudi Arabia and the UAE, with nearly $97.3bn and $71.1bn, respectively. Investment by Algeria stood at $63.7bn while it was estimated at around $36bn in Egypt and $30bn in Qatar.

In real terms, most of the region's economies recorded high growth before the collapse in oil prices and sharp output cuts reversed that trend in 2009.

Gulf oil producers were again the main victims, as heavy oil production cuts weighed on growth in their non-oil sectors. The problem was aggravated by the slowdown in credit despite record public spending. Qatar was an exception as its oil supply reduction was more than offset by a surge in its Liquefied Natural Gas (LNG) exports.

In a recent study, a major Saudi bank said it expected GCC banks to gradually open up their coffers and resume lending this year with oil prices having improved largely and most of them having built sufficient provisions against bad debt.

"In the UAE, recent events are likely to weigh on the banking sector where lending activity is weak. Latest data suggest annual loan growth was about five per cent last year, down from more than 38 per cent in 2008," the Saudi American Bank Group (Samba) said in a study on the UAE banking sector.

"By the second half of this year, we should see a revival as the impact of higher public spending and improving global economic conditions feed through," it said.

According to Samba, deposits with UAE banks have started to build again, but expected growth is at only around 8.5 per cent against 29 per cent in 2008. "As a result, banks are likely to enter 2010 with an aggregate loan-to-deposit ratio of around 104 per cent, still above the central bank limit of 100 per cent," it added.

In Saudi Arabia, figures by its central bank, the Saudi Arabian Monetary Agency (Sama), showed the combined credit provided by the kingdom's 12 commercial banks grew by only around 0.9 per cent in the first 10 months of 2009 to reach about SR751.2bn (Dh735.5bn) at the end of October.

"The uptick in private sector credit growth noted for August, proved to be something of a false dawn, and growth softened again in the following two months, recording a new low of one per cent for the 12 months to October… Private sector credit was growing at a double-digit rate as recently as April, but has been on a sharp downward path," Samba said.

It cited several factors for the slackening credit growth, including the withdrawal of many international banks from Saudi Arabia and other emerging markets.

Impact of global banks' exit

While it has never been as reliant on international finance as some other GCC countries, the withdrawal of global banks from the region has clearly had an impact on project funding in most regional states, it said.

Another factor is that banks are taking a harder look at industrial projects given feedstock constraints and a still poor export environment, Samba said.

Banks are also more cautious about projects and firms that depend on domestic retail demand which remains brittle, the report added.

A third factor is that the fallout from the debt default problems afflicting the Saudi Saad and Algosaibi family businesses "continues to reverberate".

"The scale of the problems was a shock to the banks, and has led them to take a more proactive approach with their existing clients to identify any potential debt stresses… It has also further curbed appetite for fresh lending," Samba said.

Another key bank projected a recovery in Saudi bank lending as banks seek to take advantage of a massive project potential of more than $600bn.

The National Commercial Bank (NCB) said banks appear to be still hesitant in resuming normal lending operations, following the first decline in credit in nearly seven years because of the global crisis and domestic default problems.

But the NCB stressed that banks control sufficient funds to finance massive projects in the kingdom, citing a surge in their net foreign assets and deposits with Sama.

"After the first decline in lending activities since at least 2002, will Saudi banks have enough resources to deploy in 2010? The answer is clearly a yes, given the fact that capacity utilisation had receded in 2009, with loans-to-deposits ratio falling from 87 per cent in 2008 to 77.6 per cent in 2009," NCB said.

"This capacity manifested itself in the substantial increase in net foreign assets and excess deposits with Sama amounting to around $29bn and $26bn in 2008 and 2009, respectively… Therefore, it is not the capacity question that matters, but the willingness to extend credit to existing credit holders and finance new clients."

GCC BANKS NET INCOME DOWN 8.5% IN 2009

Slow credit activity depressed the net income of banks in the Gulf Co-operation Council (GCC) states by around 8.5 per cent in 2009 despite a sharp rise in Kuwaiti banks' income.

The combined net profits of 63 national banks and financial institutions in the 29-year-old Gulf alliance slumped to $14.39 billion (Dh52.85bn) last year from nearly $15.74bn in 2008, a decline of more than eight per cent.

"[The] fiscal year 2009 was seen to be the most difficult year in GCC financial markets with the starting of the default by Saad and Algosaibi Groups and ending with Dubai's debt issue," Kuwait-based Global Investment House said.

"In reality, the financial performance of the GCC banking sector reported a drop in net profits by 8.56 per cent last year. This sector recorded increases in net profit in one country in the region – Kuwait – which saw a surge in net profits of 70.22 per cent during that year… Bahrain's banking sector reported the biggest losses in net profit, declining by 35.23 per cent," it said.

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