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29 March 2024

Bank lending in GCC remains tight despite deposit growth

(REUTERS)

Published
By Nadim Kawach

Government measures to restrict lending have allied with a more cautious attitude by banks in the Gulf to stifle credit growth after a period of record lending activity in 2007 and the first half of 2008.

Official figures showed loans and advances by the more than 150 banks in the six-nation Gulf Co-operation Council (GCC) either declined or sharply slowed down in late 2008 and the first few months of 2009.

But analysts expect lending activity to recover in some members in the second half of 2009 as their governments begin to ease restrictions on lending, cut interest rates and encourage banks to resume their normal credit activity to support high public spending and other economic stimulant measures.

"The main reason for the slow growth in lending by GCC banks are the curbs introduced by some member states on credit activity following a sharp expansion in the gap between loans and deposits. Another factor is that most banks are adopting a more cautious lending policy and imposing stricter conditions on borrowers," said Humam Al Shamma, Financial Advisor at the Abu Dhabi-based Al Fajr Securities, a key UAE stocks brokerage and investment company.

"Many banks are boosting personal loans at the expense of other credits since these loans have relatively lower risks. But I expect general lending to pick up in the second half as governments are easing curbs and the banking sector is returning to normal liquidity levels."


THE UAE

In the UAE, which has the largest banking system in the Arab World by assets, loans and advances have edged up only by about 0.8 per cent by the end of May since the start of the year to reach Dh1.003 trillion.

But deposits swelled by about 5.4 per cent to Dh972.4 billion at the end of May from Dh922.5bn at the end of 2008, according to the UAE Central Bank.

The surge in deposits depressed the loan-to-deposit ratio to 1.02 at the end of May from about 1.07 at the end of 2008.

The figures showed loans gained only about Dh6bn between April and May while they were higher by nearly Dh2bn between March and April.

After declining in the first two months of 2009, personal loans picked up in the following months to reach Dh207.6bn at the end of May, nearly Dh6bn higher than their level at the end of April.


SAUDI ARABIA

In Saudi Arabia, the Arab World's largest economy, lending fell from about SR740.1bn (Dh724.8bn) at the end of February to SR739.2bn at the end of March.

It continued its decline to reach about SR738.8bn at the end of April and SR737.6bn at the end of May, according to the Saudi Arabian Monetary Agency (Sama), the country's central bank.

Claims by the country's 12 banks on the private sector also fell from about SR730bn at the end of February to SR724.8bn at the end of May. But deposits surged from about SR845bn to a record SR902.3bn in the same period as some banks sought to attract deposits by offering higher rates.

"Saudi banks have maintained a strict lending policy since the eruption of the global crisis and the recent defaults by some Saudi groups on debt could make them even stricter," said Abdul Rahman Al Sultan, economics professor at the Saudi Imam Mohammed bin Saud University.

According to the Saudi American Bank (Samba), credit tightness by Saudi banks was also a result of their intensified drive to invest in lucrative securities in the United States and other countries. It said a series of repo cuts by Sama has failed to stimulate lending by banks despite a surge in their deposits and overall assets.

"The banks are continuing to build foreign assets as domestic lending stagnates. As we anticipated, Sama's mid-April cut to its reverse repo rate has not stimulated commercial bank lending to the private sector in the way the central bank might have hoped," said the Samba report.

"Banks have been attracted by the high yields on US debt. Rather than channelling additional liquidity towards the private sector, banks have chosen to buy higher yielding foreign assets. Lending growth is now lower than deposit growth – a trend that was last seen in February 2008."

OTHER GCC STATES

In Kuwait, loans and advances slowed down sharply in the first five months of 2009 after recording one of their highest growth rates in the first half of 2008.

From about KD23.66bn (Dh301.74bn)at the end of December, credits grew by 1.1 per cent to KD23.92bn at the end of January and only by 0.2 per cent to KD23.99bn at the end of February. They continued their slow growth to reach KD24.17bn at the end of May, an increase of just KD515 million in five months. Deposits gained a whopping KD2.76bn to peak at nearly KD27.54bn at the end of May, according to the Central Bank of Kuwait.

After a period of rapid growth, domestic credits by Qatar's banks slumped to about QR207.8bn (Dh209.7bn) at the end of May from QR220.5bn at the end of 2008. They had leaped by about QR74bn through 2008 and QR52bn during 2007, figures by the Qatari Central Bank showed.

The bank gave no data for deposits in May, but its figures showed the combined bank deposits edged up to QR206.5bn in February from QR205.6bn in January. They remained below their level of QR212.4bn at the end of 2008.

Lending in Oman recorded a slow growth rate in the first four months of 2009, rising from about RO9.25bn (Dh88.25bn) at the end of 2008 to RO9.32bn at the end of January and about RO9.34bn at the end of February. It grew to RO9.45bn at the end of March and reached RO9.47bn at the end of April.

In contrast, deposits rose from RO6.35bn at the end of 2008 to RO6.45bn at the end of January before declining to RO6.38bn at the end of February. They ended April slightly lower at about RO6.34bn.

"Credit growth in Oman has assumed a downward trend during the first four months of 2009 despite a large rise in assets," said the Central Bank of Oman.

Figures for March showed credits by Bahraini retail banks slumped to about BD5.82bn (Dh56.71bn) from nearly BD5.88bn in December. Loans had swelled from about BD5.5bn in September and BD5.07bn in June last year.

Deposits with retail and wholesale banks grew slightly from about BD9.35bn at the end of January to BD9.65bn at the end of February and nearly BD9.78bn at the end of March before falling to BD9.53bn at the end of April and BD9.50bn at the end of May.


PERFORMANCE

"Despite the tightness in Gulf banks' lending, I expect their performance in the first half of this year to be more or less equivalent to the first half of 2008," said Shamma. "Don't forget the banks have many other sources of income including interest fees, letter of credits, investments and other tools."

In comments last week, UAE Central Bank Governor Sultan bin Nasser Al Suwaidi said the banks are recovering from the financial crisis, but added that their performance would not be as good as in 2008. He said 2009 would be a relatively difficult year for banks and other sectors on the grounds they have passed through a crisis.

In a recent study, a key Kuwaiti financial centre said it expected GCC banks to suffer from a decline of about 24 per cent in their combined profits this year following several years of strong performance due to the oil boom. From $19.28bn (Dh70.81bn) in 2008, the net income of the listed banks is projected to tumble to about $14.6bn in 2009, Markaz said in the report.

Banks in all GCC nations will suffer from the decline but to a varied degree, with those in Saudi Arabia expected to record a fall of nearly 11 per cent while the decline in Kuwait could be as high as 33 per cent.

Profits are forecast to dip by 32 per cent in Qatar, 31 per cent in the UAE, 27 per cent in Oman and about 26 per cent in Bahrain, Markaz said.

Most of the decline in the banks' profits will be a result of a sharp fall in net interest income, the difference between interest expenses (for deposits) and interest income (from loans).

The report said the plunge in net interest income would be caused by higher interest on deposits as many banks in the region are expected to maintain a drive to attract deposits to offset a sharp liquidity shortage caused by the global credit tightness.

"Historically, the GCC region has had a healthy net income spread on an average of seven per cent between 2002-2008. In 2009, we expect to see a decline of 70 basis points in the spread due to increase in deposit rates," it said.

"Net interest income has been witnessing a healthy growth rate of 20 per cent during 2002-2008. However, our 2009 forecasts for near zero per cent growth both in loans and deposits coupled with increasing cost of deposits will lead to 22 per cent contraction in net interest incomes in 2009."


Personal loans

Overall loan growth in the first five month of the year was slow in the UAE but personal loans showed some signs of recovery, researchers at Dubai-based Al Mal Capital said.

"Loans for the first five months rose by one per cent while personal loans shrunk by 8.3 per cent. Personal loans are showing some signs of recovery by growing by Dh5.9 billion in May, a monthly gain of 2.9 per cent. However, market comments by various banks show they are expecting increasing defaults from this segment. Increasing delinquencies on credit card debt could contribute 0.2 per cent to the non-performing loan ratio for the banking sector," it said.

"The high margins in the personal segment are probably too hard to resist while corporate loan books are strained and may feel more stress going into the summer as the full level of real estate related defaults begins to hit the books."

Al Mal said it is "doubtful" about the impact on loan growth from the UAE Federal Government guarantees extended to corporate debt issues and bank deposits. "Banks are reticent to extend loans into a fundamentally deteriorating economic environment," it said.

In Saudi Arabia, local banks "continue to drain liquidity from the private sector" with combined foreign assets rising by 17 per cent since the end of 2008. "Net foreign assets at Sama continue to fall as the central bank repatriates funds to support local projects and counter weak loan growth from the banks," said Al Mal.

"In addition, Sama continues to encourage bank lending by reducing reverse repo rate yet again to 0.25 per cent – a steep drop from 2.5 per cent in October."

 

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