Euro crisis may hit foreign credit, bonds

Gulf banks could find it more difficult to obtain credit from global markets as lending is expected to become costlier and major Western banks could further tighten their belts because of the euro zone crisis, according to regional officials and analysts.

The crisis, triggered by Greece's debt problem, could also force potential IPO issuers to put their plans on hold as bond investors demand higher rates in such difficult market conditions, they said.

While regional banks have sufficient resources to offset that shortage after a sharp recovery in their liquidity, they have remained reluctant to resume normal lending activity following the financial crisis and their exposure to two defaulting Saudi business conglomerates.

In local Arabic press comments this week, the UAE Central Bank Governor Sultan bin Nassir Al Suwaidi warned that the European Union crisis would lead to a further squeeze of global credit, but noted that local companies no longer seek large loans from international markets.

"This crisis [euro zone] will only make getting funds from those markets costlier, but I think local companies are not after large loans now," he said.

In a new study sent to Emirates Business, the Riyadh-based Jadwa Investments said that it believed the European Union crisis would not have a direct impact on local bank lending in Saudi Arabia and other Gulf oil producers, adding that it expected domestic credit to pick up in the next few months after a sharp slowdown over the past 18 months because of the global fiscal distress.

It noted that regional banks have minimal exposure to Greece and other EU members despite market fears.

"We, therefore, continue to forecast a gradual increase in growth in local bank lending to the private sector this year," said the study.

Difficult access to funds

"Accessing finance from foreign banks is likely to become more difficult. In particular, many European banks will be concerned about their exposures to the troubled euro zone members, and so are expected to be less forthcoming in extending credit," it said.

But Jadwa added that foreign bank lending to Saudi Arabia and other Gulf countries has been subdued over the past few years due to a greater risk aversion and problems at local private businesses.

"Even though creditors have agreed to an offer by Dubai World on a restructuring of the debts, we do not see this prompting a return to greater lending in the current environment," it said.

"Tougher market conditions also mean that investors will demand higher rates on new bond and sukuk issues and could compel companies in the process of issuing debt or considering IPOs on the stock market to hold back until the environment improves."

Gulf countries have been suffering from a severe credit squeeze since the onset of the global crisis as most world banks have frozen their lending activity in the region and other countries.

Postponed projects

The foreign credit shortage, along with local lending tightness, has led to the cancellation or postponement of many projects in the six-nation Gulf Co-operation Council (GCC), mostly in the private sector.

According to estimates by the Kuwait-based Global Investment House, the total value of planned projects in the GCC dipped by about 14.6 per cent in the first quarter of this year.

From about $2.66 trillion (Dh9.77trn) in the first quarter of 2009, the value slumped to nearly $2.27trn in the first quarter of 2010, Global said in a study this week. "This decline was due to the repercussion of the global financial crisis and regional default problems," said the report.

It showed the UAE, which has the largest share of those projects, recorded the biggest decline of about 26.6 per cent to $966.7bn (Dh3.54trn) from about $1.3trn (Dh4.6trn).

Kuwait's project value fell by 6.1 per cent while there was a drop of 3.4 per cent in Saudi Arabia and Oman, 0.7 per cent in Bahrain and about 0.6 per cent in Qatar, the report showed.

The sharp slowdown in lending followed a period of credit boom in the GCC during 2007 and most of 2008 as a surge in oil prices catapulted regional economies and boosted domestic demand to new peaks.

The fall in credit allowed most banks to narrow the gap between deposits and loans after it sharply widened during the boom.

According to the Washington-based Institute of International Finance (IIF), private sector credit growth in the GCC 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 demand for credit in an "uncertain macroeconomic environment".

Sluggish lending

The 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. Third, new private sector projects coming to the market dwindled, as a number of projects were put on hold or cancelled."

Figures by the Saudi American Bank Group (Samba) showed domestic credit in the GCC sharply slacked through 2009, growing by only about seven per cent compared with 35 per cent in 2008.

Credit growth last year stood at about 2.3 per cent in the UAE compared with 38.4 per cent in the previous year, while it recorded a negative 0.3 per cent in Saudi Arabia after a record growth of about 27 per cent in the same period. Growth was estimated at about 6.3 per cent in Kuwait against 16.7 per cent in the previous year.

Qatar recorded the highest credit growth rate as its economy was little affected by the crisis, given its rapid rise in gas exports. Growth stood at 14.3 per cent last year, but it was as high as 51 per cent in 2008.

Speaking to reporters in Dubai last week, a senior IMF official said the GCC and other Middle Eastern and North African countries have started recovering from the crisis, but bank credit is still dormant.

"The region's oil exporters still face challenges in their banking systems, where credit to the private sector remains sluggish and losses on non-performing loans have yet to be fully recognised," said Masood Ahmed, Middle East and Central Asia Department Director.

"Following an extended period of high growth through mid-2008, credit in these countries slowed by an average of almost 30 percentage points by end-2009. Governments will have to balance the goal of reactivating credit with the need to strengthen financial regulations and enhance supervision, particularly in countries where there is evidence that excessive risk-taking occurred."

Liquidity growth

Credit largely slowed down despite a sharp rise in liquidity after it was severely hit by the crisis in the later part of 2008 and early 2009.

Figures by the Beirut-based Union of Arab Banks (UAB), which comprises about 470 banks in the region, showed deposits with the GCC's largest 50 banks swelled from about $537bn at the end of 2007 to $656bn at the end of 2008 and $676bn at the end of 2009. Total assets grew from $872bn to $1,022bn and $1,040bn, while loans dropped from $643bn at the end of 2008 to about $569bn at the end of 2009, according to the UAB.

Lower lending activity allied with a surge in the bad debt provisions to depress the consolidated net profits of GCC banks by about 8.5 per cent last year after a large increase in 2008.

Kuwait was the only member state to record a hefty rise in its banks' net profits, which leaped by about 70 per cent mainly because of a sharp recovery following bad results in 2008.

The net profits of banks plunged by about 35.2 per cent in Bahrain last year, while they dipped by 19.2 per cent in the UAE, 15.2 per cent in Oman, 10.1 per cent in Saudi Arabia, and 0.1 per cent in Qatar.

Good performance

Although credit has not picked up largely so far this year, analysts expect GCC banks to perform better in 2010 on the back of a recovery in regional economies due to higher oil prices.

"The outlook for banks in 2010 is more promising as GCC governments spend increasing oil revenues and capital inflows improve – although bank access to international wholesale funding markets may remain tight until the second half of the year. With a stronger economic backdrop, confidence and risk appetite should also recover. GCC banks start 2010 well capitalised and well provisioned providing a sound basis for growth," said Samba.

Another regional bank said that while profits are expected to show a solid growth, albeit at a slower pace than that seen in previous years, they will, nonetheless, be affected by the relative squeeze on margins.

"Our forecasts are based on the reasonably solid economic outlook for the region, developments that have taken place in GCC banks' balance sheets and financial indicators since the onset of the crisis, and the demonstrated strong commitments of Gulf governments to supporting domestic banks," said the National Bank of Kuwait.

"By way of summary, and despite their strong integration with global markets, the overall impact of the global crisis on GCC banks has been relatively limited and appears to be fading. And though some risk may remain for individual banks, the GCC banking sector is expected to record a solid performance this year and over the medium term."

Little impact

In a study last week, a Saudi-based economist said the GCC would be least affected in the Arab World by the EU crisis.

John Sfakiankis, Chief Economist at Banque Saudi Fransi (BSF), also ruled out serious exposure by GCC banks to the EU.

"In terms of bank risk, we are not particularly concerned about absolute banking exposures of Gulf lenders to Europe. On the other side, Bank of International Settlement data as at Q409 shows European lenders have around $174bn of Gulf exposure, US banks a small U$4bn and UK banks $83bn."

Out of the total exposure of European, UK and US cross-border banking exposure in the Gulf, half is with the UAE, 16 per cent with Saudi Arabia and 17 per cent Qatar, according to Sfakiankis.

"If a further liquidity squeeze materialises, important counter-cyclical measures can be taken by Gulf banks, based on high foreign exchange reserves and non-hesitation by regional central banks to provide emergency liquidity facilities to local banks. Certain banks in the Gulf are differentiated due to better asset quality and capitalisation but overall there are no systemic bank-wide risks."

Sfakianakis said he believed GCC countries would continue to rely on domestic funding sources, should EU bank deleveraging pick up pace.

"Saudi Arabia and its Gulf neighbours will need to be vigilant in facing what is increasingly becoming clear is a fragile global recovery that is holding ground only on the grace of hefty state stimulus intervention. Investors will continue to be anxious as they contend with Europe's serious fiscal problems, poised to hit Middle Eastern countries with varying degrees of intensity."

Delayed bonds

A recent survey by this newspaper showed companies in the GCC have already started postponing bond issuances due to higher costs and demand for higher yields from investors.

BBK, the Bahrain-based retail lender formerly known as Bank of Bahrain and Kuwait, has delayed a bond sale as investors demanded higher yields to buy emerging-market securities.

The bank met fixed-income investors in Asia, the Middle East and Europe starting from May 13, according to an invitation for the promotional tour obtained by Bloomberg News on May 11.

Citigroup, Deutsche Bank and HSBC Holdings are arranging the sale.

Sabic Capital, a unit of Saudi Basic Industries Corp, delayed the sale of a "benchmark-size" bond planned for this week because of higher costs, a banker familiar with the transaction said. Sabic is committed to the development of Saudi Arabia's financial and capital markets and promote Islamic finance, said its Executive Vice-President, Corporate Finance, Mutlaq H Al Morished.

"Sabic has three sukuk [$4.3bn, Dh15.7bn] outstanding. A significant part of our consolidated cash investment is based on Islamic structures and 30 per cent of our consolidated debt portfolio is Shariah compliant," he said.

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