Balance sheets of GCC banks to grow by 10% this year

The worst of the economic crisis seems to be over for the Gulf banking sector and the banks have been among the top performers in 2009, NBK said in its latest GCC brief.

Balance sheets of banks are expected to grow 10 per cent this year compared to six per cent in 2009, the report said.

Improved economic outlook would have a positive impact and overall performance of the banks is expected to improve in 2010.

NBK also said it expects credit to the private sector to expand by eight per cent this year and record more than double growth of 10 per cent for the next two years, compared to a 4.5 per cent growth in 2009. "More than a year has passed since the global crisis imposed its toll on GCC banks. With the worst of the global crisis now believed to be behind us, the risks facing most regional banks are ebbing, and we expect a gradual turnaround in banks' attitude and activity.

Despite the strong link and integration with global financial markets, the strong capitalisation and financial strength of regional banks, along with generous government support enabled banks to ride out these difficult times at a relatively low cost, and demonstrated their resilience and ability to weather sudden and dramatic shifts in their business environment," it said.

Global economic crisis had an impact on the region's banking sector as well, which saw squeezed margins, weak growth in assets, and more dependence on government deposits.

In the first three quarters of 2009, GCC banks recorded a drop in profits of 16.3 per cent compared to corresponding period in the previous year.

Profits drop

According to the report, the decline was around 5.5 per cent for Qatari banks, 5.8 per cent for banks in Saudi Arabia while the UAE and Oman banks saw a bigger fall of 14.9 per cent and 14.6 per cent, respectively. Bahrain was the only country to see an increase in banks' profits.

In Kuwait, according to the report, the sharp drop in profits is attributed mainly to over provisioning mandated by the central bank. Besides lower profits, banks also saw softer intermediation activity, weak growth in assets and squeezed margins, in addition to changes in balance sheet structures.

Among the factors that led to decline in performance were slower economic growth, specific problems encountered by key borrowing sectors such as investment companies, real estate developers, and equity investors, in addition to the drop in interest rates and increased reliance on official sources of funding.

NBK said 2009 witnessed the emergence of a new operating environment.

This is set to pressure banks' performance over the medium term.

As a consequence, banks might resort to changing their business models as well as strongly focussing on risk management.

Elaborating on the credit side, NBK said credit, particularly to the private sector, is the largest component of assets, and a prime source of interest revenues.

As of August 2009, data show credit to the private sector accounting for almost half of Gulf banks' combined assets. This ranges about 28 per cent for Bahrain, to 63 per cent in Kuwait and 66 per cent in Oman.

"Credit growth has been responsible for slightly more than 50 per cent of the expansion in assets over the last five years, and for two thirds since the start of 2009," it said.

Banks resorted to stricter lending in view of the economic crisis. Maintaining liquidity became a bigger focus than maximising profits, it noted. By end-August 2009, outstanding credit facilities extended to the private sector across the six Gulf countries were only 1.9 per cent higher than at end-December 2008.

NBK said in light of the economic difficulties facing the private sector across the region since late 2008, and the "associated escalation in uncertainty, banks justifiably reacted by adopting a more conservative lending approach. Their main focus shifted from maximising profits to saving their financial health and maintaining ample precautionary liquidity cushions. This resulted in a significant deceleration in the growth of credit to the private sector."

Credit growth

Credit expansion was modest on a year-on-year basis at about 3.8 per cent, the report said. These ratios are way below their levels of previous years, when credit growth averaged 30 per cent per annum over the period 2003-2008, up from an average of10 per cent in the four years prior to the start of the recent oil boom, it said.

"It is worth noting that credit growth was expected to slow down even before the onset of the global crisis as a result of measures adopted by various central banks since late 2007 to curb rising inflationary pressures. For the second half of 2009, however, anecdotal evidence suggests that demand for credit had picked up, but there is the issue of quality of demand. Under such circumstances, banks are expected to target a higher quality of borrowers across the board."

Growth in credit, according to NBK, to private sector is expected to increase to eight per cent this year compared to 4.5 per cent in 2008 and by 10 per cent every year for 2011 and 2012.

Assets growth

After witnessing a growth of more than 25 per cent over the period 2003-2008, GCC banks saw their assets grow at the lowest rates in years.

As of August 2009, these assets stood at $ 1.1 trillion, 1.4 per cent higher than their level at end 2008 and 4.2 per cent up compared to last year's corresponding period.

"The slowdown in credit growth and limited funding are to blame for this deceleration," said NBK.

Banks in most Gulf countries recorded an increase in their assets in spite of the downturn, the report said.

"Country-wise, we see an increase in bank assets in all Gulf countries, except in Kuwait and Bahrain, where assets fell by 6.3 per cent and 4.9 per cent, respectively. In Kuwait, however, this drop in assets was purely the result of the Kuwaiti dinar depreciation against the US dollar during this period that amounted to seven per cent. Kuwait is the only GCC country that pegs its currency to a basket of major currencies dominated by the dollar, while other members of the group peg their currencies to the US dollar. In local currency terms, the assets of Kuwaiti banks were actually up by 0.7 per cent year on year."

Qatari banks, said NBK, saw highest expansion in assets of 12 per cent, followed by Omani banks that recorded nine per cent.

According to NBK, recent data published by Qatar, Saudi Arabia and Kuwait shows much stronger growth in bank assets from their August levels. "In 2010, we expect growth in total assets close to 10 per cent, especially with the anticipated resumption of credit growth at stronger pace than in 2009 as the local economies benefit from the continued expansion in government spending, in addition to the expected rise in banks' foreign assets."

Despite their strong integration with global financial markets, the overall impact of the crisis on GCC banks has been relatively limited and appears to be fading. And though some risk may remain for individual banks, banks, as a sector, are expected to record a solid performance this year and over the medium term, said NBK.

Increased focus on managing their risks, controlling costs and government support, along with a positive economic environment, are set to benefit GCC banks, the report said.

"With clean balance sheets and higher provisions in place, the anticipated performance and indicators of GCC banks in 2010 and over the medium term are expected to improve relative to 2009, though more barriers and risks are expected on the road to recovery," it said.

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