GCC bank loan recovery remains slow

Credit growth is mostly in loans to government as banks are risk averse to private sector

Banks in Gulf oil producers are still relatively cautious in lending to the private sector as part of a tight policy they adopted after the eruption of the 2008 global fiscal crisis and regional debt default problems, a major bank said on Monday.

While there has been a pick in domestic credit in the six-nation Gulf Cooperation Council (GCC) over the past few months, most of the increase has been in loans to the public sector, said National Commercial Bank (NCB), the largest bank in Saudi Arabia by assets and one of the biggest banks in the Middle East.

The slowdown in credit to the private sector has been a result of the banks’ risk-averse attitude and the sector’s waning appetite for loans in an environment of economic uncertainty, NCB said in a study sent to Emirates 24/7.

The slowdown has prompted GCC governments to keep up heavy public spending to spur growth in their economies, buoyed by a better global economic climate and the recent improvement in oil prices, the study said.

“The GCC banking sector has continued to tread with caution in an uncertain

economic environment characterized by low interest rates. Even though a

recovery in credit markets is clearly underway, it remains tentative and uneven. It

will likely take several more months for the pace to significantly accelerate.”

NCB said the challenge of bad loans and provisions set by GCC banks after the global crisis and regional default problems has not been fully overcome but the situation is showing signs of stabilizing, which is creating some room for

additional lending. It noted that GCC bank earnings improved by around two per cent in the third quarter of 2010 compared with the second quarter, helped

by a robust 12.43 per cent drop in aggregate provision.

Nonetheless, the report added, the improvement was uneven with Saudi Arabia the one GCC economy to witness an actual increase by nearly 31.6 per cent.

“Even though overall credit levels are gradually rising, the improvement still tends

to be critically dependent on loans to the public sector. This reflects the continued importance of government spending in driving economic activity, while the private sector recovery has proven frustratingly slow,” NCB said.

“At least some of the lag in private sector credit seems to be linked to subdued demand rather than bank risk aversion alone.”

A breakdown showed bank lending in Saudi Arabia continued its slow recovery with a 1.9 per cent growth in the third quarter, a  slight acceleration on the 1.7 per cent increase recorded in the second quarter.

It said public sector credit was still the most dynamic element in Saudi Arabia, totaling around SR33.9 billion during the third quarter. Lending to government and quasi-government institutions expanded by 8.6 and 17.8 per cent respectively in the third quarter compared with the same period of 2009.

Private sector lending, which accounts for almost 96 per cent of total credit, rose by only 1.6 per cent, a pace equal to that seen in the second quarter. “Encouragingly, total bank credit finally exceeded its 2009 level, rising to SR774.2 billion during the quarter, which marked a 3.2 per cent increase from the third quarter of last year,” the study said.

Turning to the UAE, NCB said bank in the second largest Arab economy finally began to gather momentum in the third quarter after recording near-zero growth and occasional declines during the first half of the year.

Lending in the UAE has risen consistently since June and was up by 1.3 per cent during the third quarter compared with the second quarter.

“With the government encouraging banks to extend credit to especially small and medium-sized enterprises, personal loans for business purposes (which account for about 19 per cent of the aggregate bank loan portfolios) rose by 4.9 per cent, much higher than the two per cent growth recorded in the second quarter.”

Further, boosted by government spending, credit to the transport, storage, and communication sector advanced by 2.5 per cent in the same period while lending to the construction sector expanded by 4.1 per cent, NCB said.

“By contrast, bank claims on the private sector rose by a more disappointing

0.7 per cent to Dh726.4 billion, something that furthermore represented a clear

slowdown from the two per cent growth in the second quarter.”

Bank lending in Kuwait has also remained subdued even as compared to the rest of the region, according to NCB.

But it added that the pace of credit growth rebounded from -0.6 per cent in the second quarter to a marginal growth of 0.3 per cent in the third quarter.

Although loan growth in Qatar remains well below the extraordinary levels

seen during the 2003-2008 oil boom, when it peaked at about 50 per cent, credit

expansion has stayed ahead of the rest of the region, the report said.

It showed total loans surged by 4.3 per cent in the third quarter over the preceding quarter but noted banks in Qatar also preferred to lend to government-related entities and projects, with public sector credit expanding by nine per cent,

markedly ahead of the 2.9 per cent growth seen in the second quarter.

Bank credit in Bahrain in the third quarter staged the most robust recovery seen in entire the region, resuming growth at the pace of 2.6 per cent after a 1.1 per cent rise in the second quarter of the year.

Business loans, which constitute about 66 per cent of banks’ total portfolios in the Kingdom, grew by 6.9 per cent in a dramatic turn-around from the 4.6 per cent decline recorded in the second quarter.

Oman, similarly, saw a resumption of credit growth to about 0.7 per cent in the third quarter against a drop of 0.3 per cent in the second quarter, NCB said.

Economists said they believe the more than 150 banks in the 29-year-old GCC have started the trip towards normal lending but expected the process to take time and banks to be selective by targeting less risky sectors.

“There has already been a slight pickup in lending by banks in many countries in the region and the pace of lending growth is set to rise through 2011,” said Paul Gamble, Head of Research at the Riyadh-based Jadwa Investment.

“Banks have refined their lending policies and have become more comfortable with their own financial exposures… they also find their financial performance has been affected by the lack of lending activity, so they will tend to lend more as the economic environment improves.”

Gamble said he expected GCC banks, which control more than half the total Arab bank assets, to target borrowers with what they consider lowest credit risk.

“Some leading companies, notably those with government ownership, are hitting single obligor limits that are preventing the banks from lending more,” he said.

“Banks are therefore likely to target companies with high transparency and salary-backed loans to local individuals with little existing debt.  Despite the anticipated improvement, lending growth will be well below the pace it was in the few years up to the middle of 2008.”

In recent comments, Moody’s Investment Service said GCC banks are slowly recovering from the repercussions of the crisis and regional defaults but expected a full recovery in 2011. It urged banks to continue building up their loan loss provisions to strengthen their position and reassure investors.

Slow lending activity had its toll on the GCC banks’ performance, with their net earnings dipping by around 8.5 per cent to nearly $14.39 billion in 2009 from about $15.74 billion in 2008, according to their balance sheets.

Experts believe the combined income of banks this year will be more or less equivalent to the 2009 earnings but it will remain way below the revenue achieved during the peak boom years of 2006-2008.

“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,” said NCB Capital, an affiliate of NCB.

“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.”


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