Gulf banks are expected to net record earnings this year because of a business upsurge in the region when many major financial institutions around the world are struggling to recover from heavy losses from the US sub-prime crisis.
Most regional banks reported higher profits in 2007, except Saudi banks which were involved in unprofitable stocks brokerage deals that have nothing to do with the crippling US housing credit crisis, analysts said.
But results by banks in the Kingdom and other Gulf Arab states for the first quarter of 2008 reflected a strong start for the year and indicated that 2008 would be a record year for banks in all Gulf Co-operation Council (GCC) states.
Apart from a handful of Gulf institutions with some exposure to the US market, GCC banks have remained immune to the credit crisis while repeated interest rate cuts in the GCC to match similar US Fed reductions will have little impact on their performance this year.
“All indications point to better performance by GCC banks this year, including Saudi Arabia’s banks… first quarter results by some banks in Saudi Arabia and other GCC states are a strong indicator that 2008 will be better than 2007,” said Mohammed Al Asumi, a well-known Gulf economist.
“There might be a little negative impact on the banks from the interest rate cuts as part of their assets are in dollars, but I don’t think this will largely affect their performance this year. There are several factors that overshadow the interest rate cuts and other negative elements, mainly the high oil prices, the upswing in regional economies, and the surge in projects and domestic liquidity.”
Except in Saudi Arabia, where banks reported lower earnings, GCC banks made record profits in 2007 as a result of a sharp increase in business, mainly loans to projects in construction, real estate and other sectors.
In the UAE, the combined profits of the country’s 22 national banks and 27 foreign units surged to a record Dh24.4bn in 2007 from Dh19.7bn in 2006. Profits of the Kuwait banks listed on the stock market jumped to $3.5bn (Dh12.8bn) last year from $2.45bn (Dh8.9bn).
In Qatar, the net profits of the banks listed on Doha Securities market shot up by more than 50 per cent to QR8.05bn (Dh8.2bn) from QR5.33bn (Dh5.4bn) while banks in Oman reported net profits of RO181.8m (Dh1.8bn) in 2007 compared with RO144m (Dh1.4bn) in 2006. In Bahrain, the net earnings of the listed banks surged to $1.04bn (Dh3.8bn) from $834m (Dh3.06bn).
“We expect 2008 to be better than 2007. In the UAE, the combined net profits of the banks could rise by 15-20 per cent this year,” said Ziad Dabbas, sharedealing adviser at the National Bank of Abu Dhabi.
Saudi Arabia, which has the largest banking sector in the Middle East, was the only exception in the GCC as the combined profits of its banks dipped by nearly 15 per cent to SR30.2bn (Dh29.9bn) in 2007 from around SR35.3bn (Dh34.9bn) in 2006, according to bank balance sheets. Riyad Bank was the only bank that reported an increase of around 3.5 per cent in profits in 2007.
But officials and bankers blamed lower earnings from stocks brokerage as well as turmoil in the bourse for the lower profits.
“Turmoil on global financial markets has had a limited impact on Saudi banks and the government’s foreign assets,” said Mohammed Al Jasser, Deputy Governor of the Saudi Arabian Monetary Agency (Sama).
“Sama has a conservative policy on official reserves and the investments of commercial banks..the policy is based on medium- and long-term targets, not short-term ones, so the effect from what happened to global markets was limited. When risk is low, the risk of being affected by collapses is also low.”
But the Gulf region was not immune to the credit crisis as a handful of banks unveiled losses. One of them was the Manama-based Gulf International Bank, which saw a loss of around $757m.
The loss, which the bank said was caused by the US sub-prime crisis, prompted GCC government owners to inject $1bn to raise its capital to $2.5bn.
Losses were also reported by two other key financial institutions in the region – the Arab Banking Corp and the Gulf Investment Corp. According to bankers, the combined losses of the three institutions was around $1.5bn.
“The economies are expected to exhibit significant resilience in the face of a slowdown and are expected to continue witnessing the recent trend of high economic growth,” Global Investment House said. “The major reasons for its insulation are high economic growth, current and financial account surplus, buoyancy in domestic markets and recycling of petrodollars.”
Why is the GCC immune?
- Tremendous liquidity in the region
- GCC companies generally are operating in a different environment compared to those in the US
- Financial resources are available either through debt sourced from within the region or with equity
- Banking institutions in the GCC keep diversified portfolios in high-grade investments to mitigate risk and ensure positive return
- Effect is likely to be on those organisations that have considerable international funding exposure. According to S&P survey, aggregate sub-prime exposure of the banks in the GCC will be less than one per cent of their total asset
- The financial profile of GCC banks is very strong, with good asset quality, high profitability, and robust capitalisation
- GCC Islamic banks are not allowed to invest in such instruments
- GCC banks’ exposure to leveraged loans is much lower than that of their American and European peers
GCC banks in for good year despite global gloom