GCC banks to recover next year: Moody's

Banks in the UAE and the nearby Gulf nations are slowly forcing their way out of the clutches of the global fiscal distress and regional debt default problems but a full recovery will be achieved in 2011, according to Moody's Investment Service.

Despite substantial improvement in their asset quality, the banks in the six-nation Gulf Co-operation Council (GCC) still need to take more loan loss provisions this year after record allocations in 2009, said a senior analyst of the New York-based Moody's.

The more than 150 banks in the 29-year-old Gulf alliance generally performed well in the first quarter of 2010 compared to the previous quarter, but Moody's believes it is still too early to forecast full-year performance. Compared to the first quarter of 2009, the performance of many banks was lower.

"The banks in the GCC have stabilised, but I wouldn't say they have overcome the repercussions of the crisis… the asset quality situation is stabilising, so I think for the rest of this year we will start seeing [a] positive change unless we see a deterioration in the euro zone crisis," Mardig Haladjian, General Manager of Moody's in Cyprus, told Emirates Business in an interview.

"In 2011, I believe we will start to see a real improvement and banks in the GCC will be on a solid ground… you know EU countries are going through difficult times… so as long as Europe can contain the situation then the positive development in the banking sector here will continue… but if it gets worse in Europe, we believe it will have repercussions not only in the Gulf but globally."

More provisions

Haladjian said it was difficult to forecast the performance of GCC banks for 2010 but added there is a need for the banks to take more loan loss provisions. "In 2009, banks took a lot of provisions but whenever you have a deterioration in the economic conditions, there is a lagging effect… so for the next six to nine months, we could see new problems coming to surface. So, we believe more provisions will need to be taken by the banks this year but of course not as much as in 2009. This will put the banks on a good and strong ground, although the provisions will weigh on the their net income," he said.

"As you have seen, some banks performed well in the first quarter but the real improvement in profits will be in 2011, according to our expectations. We also believe that in 2011, loan loss provisions will be much less because there are sufficient provisions in 2010 – banks already have taken a big chunk of the requirements. That's why we believe 2011 will be quiet in terms of provisions."

According to Haladjian, building up provisions is a positive rather than a negative development, as it will send a positive message to investors and depositors. "We believe that a good cushion like provisions and capital are the chief factors that investors are looking for… they would rather see a bank making a lot of provisions and a large capital as this will give them more confidence," he said.

Slow recovery

In a recent statement sent to Emirates Business, a well-known economist based in Saudi Arabia agreed that 2010 would be a year of slow recovery for GCC banks despite a sharp slowdown in domestic credit, their main source of income. "I believe 2010 will be a year of slow recovery for GCC banks as more non-performing loan (NPL) provisions will have to be taken by some and others will have to consolidate their business. Risks will have to be re-evaluated and banks will be more cautious both on the retail and corporate side," said John Sfakianakis, senior economist at Banque Saudi Fransi (BSF).

"Hence, I expect a slow recovery in overall bank lending, characterised by a conservative lending growth and appetite from the business side. Those banks that are exposed to the real estate sector will find it not so easy. What is encouraging is that systemic risks have been avoided and central banks have been supportive at the right moment with added liquidity," he said.

According to a new report by the Saudi American Bank (Samba), despite strong government intervention and support to banks, domestic credit growth fell sharply in the GCC during 2009 as liquidity tightened in response to the global credit crunch, and banks became increasingly risk averse in the face of rising NPLs and deflated asset prices. Its figures showed tighter bank lending conditions, combined with corporate and individual deleveraging, caused annual credit growth to drop to low single digits for all but Qatar, where credit grew by 14.3 per cent.

Plunge in credit

Moody's figures showed growth in the combined domestic credit in the GCC states tumbled to only about 2.2 per cent last year from as high as 33.4 per cent in 2008 and 34.9 per cent in 2007, the last two years of the latest oil boom. Moody's gave no figures for this year but bank lending in most GCC members remained low in the first five months of 2010 as banks are still cautious and companies are not seeking big loans in present conditions. Analysts said most banks in the region are also providing only short-term and small loans.

"GCC banks have been hit less by the global crisis than banks in Europe and other areas… however, this is not a time for complacency. I think regulators in the region need to take this opportunity and improve regulations as well as the infrastructure. They should make sure they are ready for such situations, that involve bubbles not only in the property market but in the stock market and other areas [too]. As you know, whenever there is an economic euphoria, there is a bubble building up," Haladjian said. "When this bubble bursts, everyone will suffer. So, there is a need for some kind of macro-level or high-level steps. Authorities should also encourage the bond market… this is extremely important."

Haladjian said the credit squeeze by GCC banks could support the expansion of a bond market in the region, but stressed that companies need to become more transparent to attract investors for their bonds. "I think credit tightness represents a good opportunity for a bond market… as you see that whenever companies get cheap money from banks, they do not bother about bonds… so the only opportunity for the bond market to develop is when the banks will not lend or they charge too much," he said.

"So I think the opportunity is there, but for companies to start tapping the debt market they should improve transparency and governance… they should become more outward to tell the whole story to the investors."

After recording one of the best periods in 2007 and 2008, GCC banks saw their net earnings fall by nearly 8.5 per cent in 2009, mainly because of the slackening domestic credit and a sharp increase in their loan loss provisions. The UAE, which controls the largest Arab banking sector by assets and capital, made the highest provisions though 2009, allocating a record Dh12.9 billion. Saudi banks are believed to have chopped off more than SR10bn (Dh9.79bn) in NPL provisions and this was a key factor in pushing their income down by 10 per cent.

According to the Kuwait-based Global Investment House, aka Global, the net profits of 63 banks and financial institutions surveyed in its study slumped to $14.39bn (Dh52.8bn) last year from nearly $15.74bn 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 about 35.2 per cent. In contrast, Kuwait's banks recorded one of their largest increases in net income of 70 per cent.

The combined net profits of UAE banks receded by about 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.

Global said its figures on net earnings covered 63 national banks in the six GCC countries except five banks that have not disclosed their results yet. "[The] fiscal year 2009 was seen to be the most difficult year in Gulf financial markets with the starting of the default of Saad and Algosaibi Groups," Global said. "In reality, the financial performance of the banking sector in the GCC reported dropped in net profits by 8.56 per cent last year. This sector recorded increases in net profit in one country in the Gulf, Kuwait, which reported a surge in net profits of 70.22 per cent during that year. [The] Bahraini banking sector reported the biggest losses in net profit as it declined by 35.23 per cent."

As for the first quarter of 2010, Global said GCC banks performed much better compared to the previous quarter but added that their net income was lower than in the first quarter of 2009. "The GCC banking sector came out with a positive earnings surprise in the first quarter of this year, with profits almost doubling on a q-o-q basis, beating analyst expectations in many instances," Global said.

"The quarter under review remained relatively quiet, rather uneventful… The GCC banking sector performance for the first quarter was underpinned by dampened growth in assets, slightly better increase in deposits, stagnancy in net loans, marginal drop in top-line and yet a supernormal jump in earnings. An improvement in profits over the previous quarter can be attributed to a noteworthy decrease in provisions taken by the banks during the quarter as compared to the fourth quarter of 2009." Its figures showed the banks' aggregate net earnings leaped by nearly 150 per cent in the first quarter over the previous quarter. Compared to the first quarter of 2009, the profits declined by just over four per cent.

Challenges

In its latest report about banks in the GCC and other Arab nations, Moody's said they had been less affected by the global crisis than other financial institutions but warned that they still face challenges. "From Morocco to the Straits of Hormuz, banks in the Arab World have been comparatively well insulated from the effects of the recent global financial disruption and ensuing recession… the main reasons for the resilience of Arab banks are the capacity among both conventional and Islamic banks to adapt to macro-economic adversity, their minimal exposures to subprime-related asset classes, government support and sometimes interventions and local and regional idiosyncrasies," the rating agency said.

"However, challenges remain and the crisis has shed light on the different risk profiles of banks, contributing to the strengthening of some while weakening others… the financial landscape of the Arab World had begun changing before the crisis but the current environment is forcing faster adjustments."

UAE Top-line growth

On a country-wise basis, the profits of UAE banks turned from a loss in Q4 2009 to high positive figures in the first quarter of 2010, representing an increase of more than Dh4 billion. Provisions during the quarter declined significantly on a q-o-q basis but grew likewise y-o-y, leading to the drastic difference between yearly and quarterly performance.

Yearly performance, which remained dampened with a two per cent y-o-y growth, would have fared much worse had it not been for a seven per cent y-o-y increase in net interest income and a 28 per cent y-o-y jump in non-interest income.

Follow Emirates 24|7 on Google News.