GCC banks to perform better in 2012

Banks’ profits were up in 2011 but remain below pre-crisis peak levels

Banks in Gulf oil producers netted higher profits in 2011 and are expected to perform better this year because of high public spending and an increase in lending, according to a key Kuwaiti bank.

Most banks in the six-nation Gulf Cooperation Council (GCC), which controls over 40 per cent of the world’s extractable oil deposits, have recovered from the 2008 global fiscal distress and regional debt default problems but their 2011 income remains below peak levels recorded before the crisis.

“For banks in the Gulf Cooperation Council (GCC) countries, 2011 was a better year than the one before. Bank profits continued to improve and assets growth was healthy,” National Bank of Kuwait (NBK) said.

“In the current global context, the region’s economic growth is relatively good, with governments at various stages of implementing ambitious capital spending plans to boost economic growth and funding is plentiful….however, some regional banks continued to deal with the after-effects of the 2008 global financial crisis, particularly on their asset quality,” it said in a study.

The report, citing banks balance sheets, showed asset growth in the region lost steam in 2011 despite higher earnings.

“As for 2012, we expect to see the recovery in bank performance continue through the year with the overall trends intact. Project spending will continue to be the key driver for banking activity for all markets,” it said.

“Banks’ consumer lending will also contribute to an improved performance, fuelled by salary increases and employment. Meanwhile, asset quality issues will remain a problem for many banks in Kuwait and Dubai, though provisioning levels will decline gradually.”

NBK said the recovery in the GCC banking sector just finished its second year with profits still seeing strong increases.

But it noted that the 16 per cent growth registered last year was from a low base and average profitability indicators remain relatively subdued.

Return on equity (ROE) averaged 12.2 per cent, just barely higher than its level in 2010 and a far cry from the 19 per cent seen in 2007.

“However, the aggregate figures for the region hide a more divided environment. Saudi Arabia, Qatar, Abu Dhabi and Oman have all seen a generally more positive picture…….credit growth was healthy and asset quality issues were largely behind them. In these markets, profitability bounced back and lending grew at a double-digit pace.”

Bank performance in Kuwait, Bahrain and Dubai was less upbeat, NBK said, adding that while there were some differences among them and certainly individual bank results varied, the markets generally witnessed poorer credit growth and profits continued to be held back by asset quality issues.

The report showed that banks in markets seeing more robust private sector growth and substantial public sector investment saw a more rosy 2011.

Banks in Qatar, Abu Dhabi, Saudi Arabia, and Oman saw average growth in profits top 22 per cent and return on equity increasing to an average of 14 per cent. In these markets, improved profits were achieved on the back of healthy credit growth. Average lending growth reached 12 per cent in 2011.

Banks in Abu Dhabi were the only ones not to see double-digit growth in total credit. In contrast, growth in Qatar approached 20 per cent.

“This strong growth in credit was in part supported by strong government capital spending. The average annual value of investment projects executed in these four markets during the last three years topped 18 per cent of GDP.  Saudi Arabia and Abu Dhabi saw the highest intensity of new projects with annual averages of 22 and 16 per cent respectively.”

According to the study, Dubai, Kuwait and Bahrain saw a far slower pace of execution of planned capital spending. The value of executed projects accounted for an average of less than nine per cent of GDP over the last three years, half of the ratio for the other GCC markets.

It said strong consumer lending growth also provided a boost to bank profits in 2011 as growth topped 17 per cent during the year, with most markets seeing double digit growth following a far weaker year in 2010.

Bahrain, Saudi Arabia and Qatar all saw growth above 20%. Meanwhile, “Kuwait and the UAE lagged the rest of the GCC, though in both cases growth remained healthy and recovering.”

NBK noted that asset growth issues remained in the forefront for banking sectors in Dubai and Kuwait and to a lesser extent Abu Dhabi.

In all three markets, provisions to pre-provision income exceeded the GCC average, it said, adding that while Abu Dhabi’s ongoing heavy NPL provisioning did not stand in the way of strong overall profitability, this was not the case for banks Dubai and Kuwait.

In the other markets, namely Qatar, Oman and Saudi Arabia, provisioning was substantially lower, standing at 10-15 per cent of pre-provision income.

In Qatar, banks avoided high provision expenses throughout the aftermath of the global financial crisis, thanks largely to the government acquiring most of the banks’ bad loans in 2009, the study said.

“For the GCC as a whole, provisioning was highest in 2009 and has since fallen gradually. It stood at about 35 per cent then and fell to 27 per cent in 2011. The average ratio before the crisis stood at around 6.7 per cent, a level that was possible not only because of better asset quality, but also due to healthy revenue growth then.”

Turning to capital, NBK said that following the economic slowdown and the appearance of substantial asset quality issues in 2008, banks have sought to boost their capitalization and 2011 saw a continuation of that trend.

The average ratio of equity to assets across all GCC countries has been gradually rising over the last few years hitting 14 per cent at the end of 2011. Last year saw average ratios rise in most individual markets.

The report said Oman was an exception as it saw its sector-wide equity to asset ratio decline to 12 per cent.

Capitalization levels were the highest in Qatar and Saudi Arabia, where average ratios exceeded 15 per cent.

“Kuwait was the country that saw the largest improvement in capitalization with the equity to asset ratio rising from 10 to 14 per cent during the last three years. Meanwhile, Bahrain and Oman trailed regionally but with ratios that remain quite healthy, just below 12 per cent.”

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