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09 December 2023

Gulf banks' provisions will stay high for next few years

The financial crisis has resulted in reduced competition among financial institutions temporarily. (EB FILE)

By Waheed Abbas

Provisions for banks in the Gulf will remain high for the next few years amid a decline expected in revenues in coming years, analysts said.

Dr Reinhold Leichtfuss, Senior Partner and Managing Director, Boston Consulting Group, yesterday said in a media conference that though regional banks recorded decline in profitability and increased provisions, they saw rise in revenues in the first half of the previous year over the first half of 2008.

Gulf banks are well-positioned and would see lower but better growth compared to many major financial institutions around the world.

Saudi banks saw a revenue increase of six per cent, the UAE 11 per cent, Kuwait one per cent, Bahrain seven per cent and Oman 27 per cent in the first half of 2009 over the first half of 2008.

Loan loss provisions rose across the region – Saudi Arabia at 84 per cent, the UAE 225 per cent, Kuwait 126 per cent, Qatar 443 per cent, Bahrain 80 per cent and Oman 473 per cent in the first half of 2009.

Leichtfuss said regional banks' retail revenue segment remains stable and has not declined as much as group or corporate revenues. The banks also enjoy higher capital ratio than their global peers.

It ranges between 12 and 16 per cent in the Middle East but eight to 29 per cent among international banks of their balance sheet.

He said the financial crisis has resulted in reduced competition among financial institutions temporarily; for some foreign banks sold their Gulf units as part of their restructuring.

"We saw less competition in 2008 and 2009 and this trend will continue in 2010; but it [the competition] will come back later," he added.

The banks will also see pressure on margins – which fell over the past five years – because of the decline in fees.

He said overall loans growth will also be slower in coming years and they have to take rigorous risk assessment and financial planning.

Commenting on Islamic banks, he said the Shariah-complaint institutions have been hit less hard compared to their conventional peers.

Dr Klaus Kessler, head of BCG offices in the Middle East, said the economies in the Gulf will grow between four and seven per cent – varying from country to country.

David Rhodes, senior partner at the Boston Consulting Group (BCG), said the days of laissez-faire and free economy are over and the role of the governments in the markets and corporate world is growing through regulations and stimulus packages.

He said the global financial crisis has forced the governments to take the reins and are the driving force for post-crisis growth in sectors such as bio-technology, industrial, nano-technology and material sciences. The governments in the UK, France and Germany were trying reindustrialisation of economies not to create wealth but new jobs.

The corporates are also slowly getting used to the interference of the governments and will have to broaden partnership with the government. He said the real economy will see slower growth. "The first half of the 2010 might look good because the first half of last year was atrocious and secondly there is technical recovery. The real economy is not rebounding as was hoped for." He advised companies "to grab opportunities and invest in businesses because the history shows that those companies which didn't invest lost marketshare".

He said the globalisation trend has reversed.

Previously, the developed countries' products were exported to developing countries; but lately the products are manufacturer at lower costs in developing states and exported to the developed nations where they are received very well. For example, the United States represents 25 per cent of China's exports, he added.