Gulf banks will likely record their first negative growth in profitability this year in nearly eight years as they reel under liquidity tightness and an expected slowdown in general business in the oil-rich region, experts said yesterday.
Although the banks in the six-nation Gulf Co-operation Council (GCC) could still make relatively high profits, they are projected to be lower than the record income achieved in 2008 as a result of a surge in credits and other operations during the first nine months of the year, they said.
The more than 150 banks in the 28-year-old Gulf alliance have already been jolted by the global financial crisis in the last quarter of 2008 and the ordeal is expected to exacerbate through 2009 because of a sharp fall in oil prices.
The slackening in their performance could prompt a fresh wave of mergers and force some banks to recapitalise or sell stake to government and other strategic partners, according to a key regional financial centre.
In a study released this week, the Manama-based Gulf Finance House (GFH) said it expected growth in domestic liquidity to decelerate in 2009 due to the expected slowdown in the growth rate of what it termed 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 report said it observed a significant fall in bank reserves, which account for the bulk of the monetary base in all banks in the GCC as a result of the sudden capital outflow during the second half of 2008.
The report said it believed decelerating growth in petrodollar monetisation, in case GCC governments tightened actual expenditures this year, may also depress the growth levels in high-powered money.
Notwithstanding the aforementioned supply side effects of slower growth in the monetary base on the growth in private sector credit, demand for credit is also expected to fall in 2009 as the corporate sector cuts back on production and expansion plans, according to the report.
"In our opinion, these dynamics will affect GCC banks in four key ways… 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 on investment portfolios and lower fee income on bottom lines. Some banks will need to recapitalise or merge, and, in the process, cut back on credit expansion to improve capital adequacy metrics," GFH said.
"Second, 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." The report also expects 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.
Corporate loans will lose importance as a driver of balance sheet growth in 2009, in line with the economic slowdown, it noted.
"Finally, we will see a much weaker appetite for asset-backed loans, particularly mortgages and share margin financing. Similarly, indirect exposure to asset-backed loans, as is the case in lending to investment banks and companies, will also be on the black list during 2009. Several of these companies, as in Kuwait, have posted sharp losses due to the collapse in local/global asset prices."
Despite GCC government measures to support the banking sector against the global economic crisis, several banks in the region are expected to record lower earnings in the last quarter of 2008 due to the business slowdown, liquidity shortages, losses by some banks in world markets, and the fact that most of them have become more careful in providing loans.
"The slowdown in earnings growth across the GCC started from Q3 of 2008, coinciding with declines in commodity prices, freezing in the credit markets and a downturn in stock markets," the Kuwaiti Finance House (Markaz) said. "In 2009, we expect earnings growth to be zero per cent with severe stress in earnings of investment services companies, banks and real estate firms."
In Saudi Arabia, by far the largest GCC member and the world's dominant oil power, banks began to feel the pinches of the global crisis in the third quarter and the problem worsened in the last quarter.
After surging by 29.1 per cent and 8.3 per cent in the second and first quarters of 2008, the combined net profits of the Gulf Kingdom's listed banks plunged by nearly 22.2 per cent in the third quarter, according to their balance sheets.
The decline was partly due to growing loan loss provisions which reached nearly SR1.2 billion (Dh1.17bn) at the end of September.
"Since the beginning of the global financial crisis in August 2007, it became apparent that no country, industry or individual will escape the unfolding negative repercussions, whether they emanate from the mere psychological fear or the weak macroeconomic fundamentals or both," the National Commercial Bank (NCB) said in its weekly economic bulletin last week.
"As a result, the Kingdom was no exception in being relatively impacted despite the fact that the economy continued to achieve healthy twin surpluses in the fiscal and current account balances… accordingly, it is appropriate to view the Saudi banking performance in this current context especially that the first decline in profitability this year by 22.2 per cent Q/Q in 3Q08 came in after positive growth rates of 29.1 per cent and 8.3 per cent in 1Q08 and 2Q08, respectively."
In another report, a key Gulf investment bank said the global financial crisis has impacted Saudi banks despite what it termed as their limited exposure.
"The Saudi banking sector, with its limited exposure in the world markets, was somewhat able to escape the severe implications of the global financial distress. However, being an important part of the intertwined global markets, some of the dampening effects were directly or indirectly translated into the Kingdom's banking sector performance," the Kuwait-based Global Investment House said.
Balance sheets for the last quarter showed three of Saudi Arabia's largest banks recorded lower earnings after booking higher provisions to cover local and foreign investments and growing lending activities. They include Al Rajihi Group, Riyad Bank and the Saudi Arabian British Bank (SABB). Both SABB and Riyad Bank said they had to make additional provisions to face the decline in capital markets and other losses.
In the UAE, which has the Arab World's largest banking sector in terms of deposits and capital, banks were expected to unveil higher profits for 2008 but the income is projected to be lower in 2009.
"Talking about the banks in the UAE and other GCC states, I think their profit growth will be lower in 2009 because of the global credit tightness and the expected economic slowdown in the region," said Fouad Zeidan, an economic advisor at an Abu Dhabi-based national bank.
"Other key factors include the fact the banks will have less investment and financing opportunities because many projects could be shelved and GCC governments could cut investment plans due to the decline in oil prices… although some of them have assumed higher spending through 2009, I don't think there will be a large increase in actual expenditure because oil earnings are expected to be sharply lower. As a result the Gulf banks could record their first negative profit growth in many years."
According to the Saudi American Bank (Samba), UAE banks recorded high profits in the third quarter of 2008 but they had come under pressure in the last quarter as a result of stock market and real estate losses.
"Looking ahead, banks face an increasingly tough time in the face of falling oil prices, weak stock markets and pressure on real estate prices. With access to wholesale funding more difficult and costly to obtain, banks are likely to have to deleverage their balance sheets," Samba said.
GCC states – the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman – netted a record $518 billion (Dh1.9 trillion) in oil exports in 2008 but their 2009 income could plunge by more than 50 per cent as crude prices could average at half their 2008 level.
Considering the sharp fall in prices and an expected steep decline in crude output, their oil revenues could tumble below $200bn.
"Looking at the financial and economic situation in the region, you cannot expect Gulf banks to maintain the rapid growth in their profits this year," said Zuhair Kiswani, Director of the Sharjah-based Al Sharhan Securities. "These banks narrowly escaped the crisis's impact in 2008 and I don't think they will escape this year. I am talking about a real decline in profits compared with 2008."