Bottom lines of UAE banks weather profit decline in Q3 2009

The Gulf banks experienced significant decline in profits in the third quarter and first nine months of this year, said a research report.

While the bottom lines of the UAE and Saudi banks were less impacted despite the fact that banks from these two countries were the major contributors of non-performing loans and provisions, it said.

This came as a positive surprise since asset deterioration, now a pandemic, has led banks to take heavy provisions, unleashing havoc on their earnings, Global Investment House said in a report.

The GCC banks – excluding Bahrain – experienced a significant profit decline in third quarter 2009 as compared to the previous year; down nine per cent year-on-year for the quarter and down 13 per cent y-o-y for the nine months of 2009.

While earnings in Q3 for Kuwait, Qatar and Oman declined 32 per cent year-on-year, 20 per cent y-o-y and 26 per cent year-on-year respectively. The UAE and Saudi Arabia enjoyed a better fate with a decline of six per cent year-on-year and rise of 2.1 per cent year-on-year, respectively. On a nine-month basis, banks in all countries declined in profitability with Kuwaiti banks standing out as the worst hit, exhibiting a 45 per cent y-o-y erosion in profits, while Saudi banks maintained to contain the decline to just two per cent y-o-y . Banks in the remaining countries witnessed a decline of 13-15 per cent in profits in nine months.

Heavy provisioning remained the theme common to all banks in GCC, as deteriorating asset quality went unhindered and turned into the biggest nightmare for the lenders in the GCC.

Aggregate provisions taken by the GCC banks increased about threefolds in the third quarter on a y-o-y basis and more than doubled y-o-y for the nine month period. Provisions in third quarter which remained relatively unchanged q-o-q, eroded 22 per cent of the aggregate total income of GCC banks.

Banks have been severely affected by the Saudi conglomerates, the Sa'ad and Al-Gosaibi groups that defaulted on $10 billion (Dh36.7bn) of loans, as per news reports.

The main cause of heavy provisioning can therefore be associated with the exposure banks have to these Saudi groups.

Banks, particularly those in the UAE, have also disclosed that delinquencies from other corporates and even retail (especially credit card loans) have also contributed to increasing provisions.

ADCB stands out as the bank worst hit by provisions among the GCC banks under GIH coverage; its exposure to the Saudi groups, reported at $609 million is calculated to be 76 per cent of the total exposure disclosed by the UAE banks (under our coverage) and 54 per cent of the total exposure disclosed by GCC banks (under our coverage).

As per GIH review, provisioning accounted for 65 per cent of the bank's total income in Q3. Consequently, UAE banks seem to be the worst hit (by provisions) among their regional peers followed very closely by Kuwaiti banks.

On a country-wise basis, while the provisions/total income ratio was calculated at 14–16 per cent, the same for Kuwait stood at 27 per cent for the Q3 period. Excessive provisioning in Kuwait was due to KFH and Gulf Bank, where the former seems to be attempting to increase its loan loss coverage while the latter is still recuperating from an equity wipe-off and issues including exposure to the Saudi groups (as per market news).

On a brighter note, except for Saudi and Qatar, provisions eased-off in the Q3 2009 as compared to the previous quarter, indicating that improvement may be witnessed going forward.

The top-line (net interest income) of the banks in the GCC improved significantly, despite the economic woes haunting their respective countries.

Figures reveal that net interest income (NII) grew 13 per cent y-o-y for the Q3 and an even higher 19 per cent y-o-y for the nine-month periods. The major beneficiaries were the UAE, Qatar and Oman which saw a rise of 22-36 per cent YoY in their NII for the 9M09.

Kuwait remained a laggard in this respect with a five per cent y-o-y increase in the nine-month period (two per cent y-o-y decline in Q3) where banks on the large seem to be struggling with keeping their NII afloat with little respite in sight.

Aggregate NII of KSA banks increased 11 per cent y-o-y in nine months, however, the decrease in the same by 5.4 per cent q-o-q (for Q3) does not send positive signals across. While the NII grew substantially in most countries and remained stagnant in others, a major slow-down in loans growth seemed to be a story similar for all banks in the GCC countries. The collective loans of the GCC banks grew by a very low six per cent YoY in Q3 and an even lower three per cent YTD. Banks in Qatar witnessed the highest growth in loans at around 13 per cent y-o-y while loans growth of the remaining GCC countries ranged from 6-8 per cent y-o-y. Saudi banks witnessed the smallest growth among GCC banks, whereby its loans inched by 3 per cent y-o-y in 3Q09. Interestingly, Qatari banks showed anomalous behaviour with their aggregate loans jumping by seven per cent q-o-q in 3Q09.

The spreads of banks in the nine months on the whole remained headstrong and contributed majorly to the improvement in the NII. Spreads have increased despite a decreasing interest rate scenario, given that banks are less willing to lend while demand still exists, focusing more on managing the quality of existing loans rather than lending in a challenging economic environment; while the capacity to lend exists, the willingness to do so does not.

Moreover, banks are now charging a premium-of-sorts on loans freshly disbursed, to be compensated for the increase in the perceived risk they are undertaking.

As a result the lending yields have stubbornly stood relatively unchanged over the comparative period, while cost of funds has declined in line with benchmark interest rates.

As per GIH estimates, the spreads of the UAE and KSA have increased, that of Oman have remained unchanged over the previous year while that for Kuwait and Qatar have declined. Deposits of the GCC banks however, portrayed a better growth pattern (still slower than earlier years), growing 14 per cent y-o-y and consequently, led to an easing off in liquidity, with the aggregate LDR (net loans to customer deposits) dropping gradually from 101 per cent in Q3 to 94 per cent in Q3.

Interestingly, the deposits of KSA and Kuwait declined in Q3. On a comparative basis, Kuwait and KSA are the only two countries in the GCC with LDR below 100 per cent, as of Q3. The lowest LDR was reported by Bahrain, at 63 per cent, while the highest was reported by Oman, at 108 per cent. Aggregate figures, as well as individual countries' figures, have shown that LDRs have come down from their peaks in the previous year.

The GCC banking sector as a whole remains robust despite its asset quality issues. With high capital adequacy ratios (CARs), the sector remains in a comfortable position to absorb severe asset deterioration.

GIH calculations relate that the equity/loans ratio of the GCC banking sector stands at 19 per cent at the end of Q3, up from 15 per cent in the end of 2008. This indicates that GCC banks have the capacity to absorb losses/provisions to the tune of 19 per cent of loans, which offers a very adequate cushioning for bad times.

With a rise in oil prices and increase capital expenditure undertaken by most of the GCC governments and improvement in the local and international financial markets, a recovery in the economy is expected to come about in the next fiscal year.

The banking sector which works as a proxy to the economy is expected to fare positively, though recovery is not expected to be instantaneous, said the report.

GIH believes that banking spreads will come under pressure, as yield on earning assets adjusts to more normalised levels and the room for decline in the cost of funds diminishes.

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