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28 March 2024

GCC bank credit remains stagnant

Published
By Nadim Kawach

Banks in Gulf oil producers are still reluctant to reopen their massive coffers and resume normal lending nearly two years after most economies were jolted by the 2008 fiscal distress, according to a key Saudi investment firm.

The sharp slowdown compared with the pre-crisis boom years of 2007 and 2008 has been complicated by regional debt default problems and a massive downturn in the real estate sector in some regional nations because of the global credit squeeze, NCB Capital said in a study about the region’s banking sector.

What is aggravating the problem is that economic uncertainty caused by the slowdown in global recovery has dampened domestic appetite for credit while many banks in the six-nation Gulf Cooperation Council (GCC) have been quite busy consolidating their loan loss provision base.

“The GCC banking sector has shown considerable resilience in the face of the global financial crisis. Nonetheless, lending activity has stalled sharply from the oil-fueled boom of 2004-2008 when bank credit nearly tripled thanks to an annual growth of around 29.5 per cent,” NCB Capital said.

“The reversal was amplified by diminished international capital inflows and a drop in the oil export earnings that had underpinned the favorable liquidity situation during the boom….GCC banks’ loan books grew by a meager 3.6 per cent in 2009 and a slump in the real estate market forced many banks to set aside higher provisions for bad loans.”

The study said defaults in the corporate sphere, along with delays in addressing them, further exacerbated the problem. Despite uncertain financial conditions, the performance of GCC banks is showing signs of improving, it added.

Citing banks’ balance sheets, the report showed their combined net income jumped by nearly 150 per cent in the first quarter of this year compared with the last quarter of 2009. But the earnings fell by around four per cent in the second quarter while year-on-year profits also dipped by four per cent in the first quarter and nearly five per cent in the second quarter. According to NCB Capital, the decline was far short of the16.5 per cent drop recorded in 2009.

“Credit growth in the GCC has been dampened by a rise in provisioning as well as the overall economic uncertainty due to oil price volatility, corporate restructurings, and the influence of external factors, notably the enduring crisis in the West. Balance sheet strains which were built up during the credit boom of 2007-2008 have been exacerbated by a rise in loan defaults and a general slowdown in economic activity,” the study said.

“At the same time, the general risk aversion of businesses has tended to reduce the demand for credit. The pace of bank lending growth, while showing
signs of improvement, remains far short of pre-crisis levels. To date, improvements have been confined to pockets, such as public sector projects and, especially in Saudi Arabia, consumer credit.”

Figures by Moody’s Investment Service showed the combined loans provided by the GCC’s more than 150 banks stood at around $890 billion by the end of 2009, recording a growth of only around 2.2 per cent over the previous year. The increase was sharply below the 33.4 per cent growth recorded in 2008 and the record rise of 34.9 per cent recorded in 2007.

Despite the slow growth in the banks’ deposits, the slackening in lending growth sharply cut the loan-to-deposit ratio to about 92.1 per cent at the end of 2009 from 97.8 per cent at the end of 2008, Moody’s figures showed.

NCB Capital’s figures for Saudi Arabia showed total bank credit grew at a rate of 1.7 per cent in the second quarter of 2010 over the previous quarter.
On a monthly basis, total credit growth picked up pace in the first half of 2010. After declining by 2.1 per cent in December last year, credit growth has shown an upward trend in the six months to June when it rose by about one per cent.

“While private sector lending rose fairly consistently by 0.2-0.6 per cent a month, public sector credit growth seesawed through the first half, declining by nearly 5.3 per cent in May and surging 9.9 per cent in June,” the study said.

“Overall, Saudi banks continue to maintain a cautious stand towards private sector lending with most credit growth in recent quarters linked to projects where the government is a key stakeholder.”

In the UAE, the banking sector has been hit by regional default crises as well as efforts by the Central Bank to reduce loan-to-deposit ratios, the report said.

Official data showed total credit growth surged by a remarkable 13.1 per cent in the second quarter of 2008 but then contracted by 0.5 per cent in the fourth quarter. It recovered slightly by about 0.6 per cent in the first quarter of 2010.

Despite a 1.9 per cent rise in deposits in the second quarter of 2010, credit grew at a slower pace of 0.4 per cent. On a monthly basis, credit growth was almost stagnant during 2009 compared to growth rates of 3-6 per cent in 2008.

“In contrast to Saudi Arabia where public sector lending constitutes about 3-4 per cent of total lending, the share of credit to the government has ranged between 8-10 per cent in the UAE. Commercial bank credit the government during the first quarter of this year inched up by 0.8 per cent from the previous quarter and surged by 23.4 per cent from a year ago,” the study said.

“In keeping with the government’s stimulus strategy, public sector lending was stepped up during the most acute phase of the crisis in 2009.”
The report showed credit to the public sector grew consistently during the first half of 2009, reaching 4.6 per cent in September before slowing down thereafter.

In Kuwait, credit growth has been particularly subdued by regional standards, according to NCB Capital, an offshoot of the Saudi National Commercial Bank. The overall pace of growth declined from 1.9 per cent in the fourth quarter of 2009 to 0.1 per cent in the first quarter of 2010 and thereafter relapsed to a negative 0.6 per cent in the second quarter of this year, the report showed.

“However, reflecting a sectoral turnaround, supported in part by renewed government infrastructure spending, credit to the construction sector surged by 5.5 per cent in the second quarter of 2010 even as loans to real estate declined by 1.8 per cent,” the report added.

In Qatar, private sector credit has matched the broader regional pattern of relative stagnation, NCB Capital said.

“By contrast, public sector credit, in spite of some volatility, has been much more dynamic, rising from 16 per cent of total bank credit in the first quarter of 2009 to around 30.6 per cent a year later,” it said.

The pace of credit growth in Oman slowed from 2.2 per cent in the fourth quarter of 2009 to 1.7 per cent in the same period of this year, the report showed.
Bahraini banks on the other hand resumed lending in the second quarter of 2010 as credit off-take surged 6.7 per cent as compared to a 2.3 per cent decline in the previous quarter, the study said.

“This was driven in large part by an increase in public sector loans which grew to BD410.7 million at the end of the second quarter of this year as compared to BD380.4 million at the end of the first quarter.”