Bank lending in Gulf oil-producing states is projected to pick up in the second half of 2010 but will generally remain dormant compared with the pre-crisis credit boom despite the recovery in regional economies, according to analysts.
Credit by the more than 150 banks in the six-nation Gulf Co-operation Council (GCC) has grown at a lame duck pace so far this year, to extend more than a year of crippled lending activity because of the 2008 global financial crisis and exposure by many banks to regional default problems.
What complicates the problem is that banks appear to be still unwilling to sanction long-term loans while domestic demand has remained stagnant as many companies are disheartened by the global uncertainty. Lending to the less-risky public sector has also remained weak as government coffers have been replenished by the recent improvement in oil prices.
"Total credit for the region will increase this year versus last year, when it froze completely. We would see bank lending picking up in the GCC in the second half of the year but it would remain below what we saw prior to 2009," said John Sfakianakis, Chief Economist at Banque Saudi Fransi (BSF).
"But we can't generalise as to the causes of lacklustre lending in the region. In the UAE, banks over-relied on the property sector and that sector is now in the negative list as it continues its downward trend. The UAE will have to rediscover those sectors that have sustainable growth and for its private sector to generate demand away from real estate, [but] that is not easy and will take time."
Speaking to Emirates Business, Sfakianakis said that in Saudi Arabia, the largest Arab economy, the demand side is not yet there but that banks are careful to not lend to any corporate for just any project.
"Some of the smaller GCC states such as Bahrain, Qatar and Kuwait also can't expect retail lending of banks to take off as there is a [certain] amount of home loans and credit cards that banks can give and prudent measures have to be adhered to, so as to avoid over-lending."
In recent comments, Moody's Investment Service said GCC banks are slowly recovering from the repercussions of the crisis and regional defaults, but are expected to recover fully in 2011. It urged banks to continue building up their loan loss provisions to strengthen their position and reassure investors.
UAE bank credit grows
Figures by the UAE Central Bank showed total bank credit growing by a meagre 0.3 per cent in the first five months of 2010 and only around 2.4 per cent through 2009 after leaping by at least 35 per cent in 2008.
A breakdown showed most of the increase was in credit to the government as there was negative growth in lending to the private sector. During 2009, credit to the government jumped by about 26 per cent before slowing down to around 0.8 per cent in the first quarter of the year.
Credit to the private sector dipped from Dh630 billion at the end of 2008 to Dh607bn at the end of 2009 and nearly Dh604.7bn at the end of March. "Banks in the UAE still appear to be reluctant to lend on a large scale to the private sector. On the other hand, demand for credit by companies is still weak," said Ziad Dabbas, an analyst at the government-controlled National Bank of Abu Dhabi. "There might be a pick-up later this year, but I think it will take time for the banks to return to pre-crisis lending levels."
In Saudi Arabia, which has the second largest Arab banking sector after the UAE, claims on the private sector grew by around 2.1 per cent in the first four months of 2010. They had recorded zero growth through 2009 compared with a massive 27.2 per cent increase during the previous year. But figures by the Saudi Arabian Monetary Agency (Sama), the kingdom's central bank, showed bank claims on the government picked up by around 13.4 per cent in the first four months of 2010 after dipping by nearly 24 per cent in 2009.
"Growth in monetary aggregates decelerated sharply in the first quarter of 2010, with the monetary base and the money supply registering year-on-year growth rates of 0.3 and 4.7 per cent compared to 37.9 and 10.7 per cent in 2009, respectively.
"This development reflected the restraint on the money creation process largely attributed to Sama's proactive policy of mopping up excess liquidity through new issuances of treasuries," National Commercial Bank (NCB), Saudi Arabia's largest bank, said in a study.
"Sama had increased the volume of T-bills by SR34.4bn (Dh33.66bn) since December 2009, a 43.8 per cent quarter-on-quarter gain in the first three months of the year, thereby weighing heavily on banks' excess reserves that plunged by SR29.4bn during the first quarter of 2010.
"Even though lending activities had nosedived, the recent pick-up in inflation and the anticipated maturity of large portions of Saudi Government Development Bonds warranted the decision," the study added.
Slow improvement in Saudi lending
According to BSF, bank lending in Saudi Arabia is gradually picking up but the improvement has been very slow. Its latest quarterly business survey showed company managers in the kingdom are now less upbeat about banking lending.
"While normalcy is beginning to return to bank lending after a stagnant 2009, improvements will continue to follow [at] a very slow pace. Some 34.2 per cent of respondents said banks' lending attitude would return to 'normal' in the next two quarters against 33.1 per cent in the second quarter while the number of executives describing banks' lending outlook as 'very good' or 'excellent' stood at 19.2 per cent in the survey, down from 25.4 per cent in the second quarter."
In Kuwait, credit edged up by only 0.2 per cent in the first four months of 2010 after growing by nearly 15 per cent in 2009. But growth in 2009 was far below the boom rise of nearly 32.5 per cent recorded in 2008.
Bank credit in Oman rose by about 1.1 per cent in January but there was no official data for the following months. In 2009, lending growth was put by the Central Bank of Oman at around 6.2 per cent compared with a staggering 37.5 per cent though 2008. Credit by retail banks in Bahrain receded by around 2.1 per cent in the first four months of 2010 after growing by nearly 3.2 per cent in November.
Qatar, the world's largest gas exporter, appeared to be an exception as its bank credit remained robust, swelling by about 9.8 per cent in the first two months of the year. The pick-up followed a sharp slowdown in credit, which grew by around two per cent in 2009 compared with nearly 34 per cent through 2008.
"Private sector credit growth, for the region as a whole, fell from a weighted average of about 30 per cent in 2008 to less than three per cent in 2009, reflecting a reduction in both the supply and the demand for credit in an uncertain macro-economic environment," the Institute for International Finance (IIF) said.
"Deposit growth outpaced credit growth, improving liquidity ratios. A number of factors contributed to the sluggish private sector lending in 2009. First, banks were cautious about corporate growth prospects in an environment of weak domestic demand. Second, global funding conditions tightened considerably, and third, new private sector projects coming into the market dwindled, as a number of projects were put on hold or cancelled."
GCC banks' profits expected to rise
Tight credit allied with a sharp rise in loan loss provisions to depress the combined net earnings of GCC banks by more than eight per cent in 2009 but analysts expect this year's profits to be equivalent or slightly higher.
Bank balance sheets showed the net profits of the UAE banking sector tumbled by nearly 19 per cent while there was a plunge of around 35 per cent in Bahrain. The income dropped by about 10 per cent in Saudi Arabia, 15 per cent in Oman and only 0.1 per cent in Qatar. In Kuwait, banks' income leaped by around 70 per cent mainly because of a severe decline in the previous year.
GCC credit has remained stagnant despite projections by the World Bank that regional economies will sharply rebound this year on the back of higher oil prices and massive public spending within counter-crisis fiscal stimulus measures.
The World Bank has forecast the GCC economy will swell by around 4.4 per cent during this year to spearhead growth in the Middle East and North Africa.
Growth for the GCC this year is far higher than the 0.8 per cent rate recorded in 2009. "The GCC countries are leading regional recovery as oil prices have rebounded and the GCC financial sector is stabilising. Growth in the GCC countries is projected at 4.4 per cent in 2010 – a remarkable comeback, given close to zero growth in 2009," the World Bank said.
Dormant credit depressed the loan-to-deposit ratio in most GCC member states last year, except in Qatar, where it grew from 0.97 per cent at the end of 2008 to 1.05 per cent at the end of 2009, according to IIF.
In the UAE, the loan-to-deposit ratio declined from 1.37 per cent to 1.12 per cent while it fell from 0.9 per cent to 0.8 per cent in Saudi Arabia; from 1.13 per cent to 1.05 per cent in Kuwait; from 1.22 per cent to 1.21 per cent in Oman; and from 0.97 per cent to 0.91 per cent in Bahrain.