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14 April 2024

GFH says Gulf banks and firms poised for mergers in 2009

By Nadim Kawach

Gulf banks are expected to record lower earnings in 2009 as they continue to suffer from the global financial turmoil and this could trigger a wave of mergers in the sector this year, a key regional bank said yesterday.

The Bahraini-based Gulf Finance House (GFH) said it also expected consolidations in the private small and medium enterprises while a decline in assets of some firms would tempt investors to acquire some of them.

In a study about the impact of the global economic distress on the GCC, GFH presented a gloomy outlook for the economies of the 28-year-old group as a result of an expected 60 per cent plunge in oil export earnings.

The study expected the decline in the GCC countries' oil revenues to a five-year low in 2009 would also hit their foreign assets after a rapid growth during the seven-year oil boom, which it said ended in the fourth quarter of 2008.

After a surge in the first half of 2008, growth in the GCC's domestic liquidity will decelerate in 2009 due to the expected deceleration in the growth rate of petrodollar monetisation, a key driver of the monetary base, and decelerating growth in credit to the private sector, which influences the magnitude of the money multiplier, the study said.

Its figures showed a significant fall in bank reserves, which account for the bulk of the monetary base in all GCC banks. It attributed the fall to the sudden capital outflow during the second half of 2008, adding that slower growth in petrodollar "monetisation" in case GCC governments tightened expenditure this year, could also depress the growth levels in high-powered money.

"Demand for credit is also expected to fall in 2009 as the corporate sector cuts back on production and expansion plans. This will cut off a key source of deposits to GCC banks along the credit/deposit creation chain. In our opinion, these dynamics will affect GCC banks in four key ways," GFH said.

"First, most GCC banks will witness profit contraction during 2009, as a result of slower growth in business volumes. Lower net interest income will compound the impact of losses. Some banks will need to recapitalise or merge, and, in the process, cut back on credit expansion to improve capital adequacy metrics." The study said the second effect is that in order to ensure adequate capitalisation, banks will take one of three routes – either recapitalise earnings and cutback on dividends, seek private shareholders' money via rights issues, and/or sell stakes to strategic investors, government or quasi-government bodies, as has been the case in Qatar recently.

"Third, in addition to recapitalisation, we expect to see a drift in the banking sector asset mix towards three main secure asset classes, namely deposits with central banks, government-salary-backed consumer loans and loans to government/public sector entities.

"Finally, we will see a much weaker appetite for asset-backed loans," it said.