Gulf banks witness fall in assets as funds are still hard to raise

Gulf banks suffered from a decline in their assets in January for the first time in many months as they struggled to get funds to offset a severe liquidity shortage triggered by the global financial distress, according to official figures.

With the exception of Qatar, which has not yet provided data for January, the combined assets of the banks in the other countries of the six-nation Gulf Cooperation Council (GCC) recorded a drop despite measures by monetary authorities in some members to support the banking sector with cash injections and relaxation of reserve requirements.

The UAE

In the UAE, which has the largest banking sector in the Arab region, the combined assets of its 24 national banks and 28 foreign units declined to around Dh1,466.5 billion at the end of January from Dh1,480.5bn at the end of December after recording a steady increase in the past months.

Figures by the Central Bank showed their loans and advances recorded one of their slowest growth rates in two years as they edged up by only around 0.4 per cent to Dh1,022bn from Dh1,018bn during the time.

But deposits suffered from their first fall in more than a year, dipping to around Dh905.7bn from Dh922.5bn after growing from Dh906bn at the end of November and Dh883bn at the end of October.

After slipping by around Dh3bn in December, the banks' capital and reserves recovered to nearly Dh177bn at the end of January from around Dh153.6bn at the end of December, the Central Bank said.

Despite the decline, the UAE banking sector retained its position as the largest in the Arab Wrld in terms of assets after overtaking Saudi Arabia in 2007.

Saudi Arabia

Saudi banks' total assets remained almost unchanged at around SR1,302bn (Dh1,289bn) at the end of January but they had receded from around SR1,308bn at the end of November, according to the monthly bulletin of the Saudi Arabian Monetary Agency (Sama), the country's Central Bank.

The decline was mainly in claims on the government, which plunged to around SR209bn at the end of January from SR241bn at the end of December.

Bankers said the decline followed government measures to cut debt to banks and other institutions after it recorded a massive budget surplus last year.

Claims on the private sector also shrank to around SR729bn from SR734bn in the same period while the banks' foreign assets rebounded to nearly SR157bn from SR153bn after dropping from SR161bn in November.

The figures showed the banks' statutory deposits with Sama remained almost unchanged at around SR44.6bn while other unspecified deposits jumped to nearly SR70bn at the end of January from SR41bn at the end of 2008.

Kuwait

In Kuwait, the combined banking assets slipped to KD39.20bn (Dh490bn) at the end of January from KD39.24bn at the end of December and around KD40bn at the end of November.

The decline was caused mainly by a drop the banks' foreign assets to nearly KD84.2bn from KD87.9bn. Their credits to residents edged up slightly to around KD23.9bn at the end of January from KD23.6bn at the end of December while other assets fell to KD995 million from KD1,322m.

Bahrain

Bahrain, which has the largest offshore banking sector in the region, suffered from a sharp decline in its bank assets, which plunged to nearly $244.5bn (Dh897bn) at the end of January from $252.3bn at the end of December, according to the Central Bank of Bahrain.

The largest decline was in their foreign assets, which slumped to around $197.9bn from $203.6 bn in the same period.

Oman

In Oman, official figures showed the combined assets of its banks recorded a slight decline for the first time in nearly a year, dropping to RO13.51bn (Dh130bn) at the end of January from RO13.78 bn at the end of December.

Most of the decline was in cash on hand and deposits with the Central Bank of Oman, as they dropped to around RO1,089m from RO1,430m.

Balance due from foreign banks also receded to around RO1,094 million from RO1,199 million in the same period.

Lower profits

In a recent study, the Manama-based Gulf Finance House (GFH) said it expected GCC banks this year to suffer from their first negative growth in their profitability in eight years as a result of credit tightness, the collapse in crude prices and lower business activity in the region.

"In our opinion, these dynamics will affect GCC banks in some 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."

GCC economy

Besides the lower performance in the banking sector, the GCC economy is also expected this year to record its first decline in real and nominal growth in seven years as a result of the sharp fall in crude prices and a projected decline in production.

Experts believe this will have a direct impact on the bank's performance as it means slower activity despite higher public spending in some members.

After hitting their highest level in 2008, the GCC's combined oil export earnings are forecast to plunge by at least 50 per cent this year to nearly $200bn as prices could average below $50 a barrel compared with $95 in 2008. The Group's oil output could also tumble to around 12.5 million barrels per day from more than 14 million bpd in 2008.


Saudi banks tighten lending policy despite enough liquidity

Saudi banks still have sufficient liquidity to meet domestic demand for credit but they are adopting a tight lending policy following a sharp growth over the past year, according to a key Saudi bank.

As the kingdom is plunging slowly into a recession because of the sharp fall oil prices and its production, private sector demand for credit is also slackening, the Saudi British Bank said in a study.

"We think that the debate about banks' liquidity should be refocused. Liquidity in the strict sense for a bank is its ability to meet its financial obligations as they come due," it said.

"We think that banks are liquid in that sense and far more liquid than many regional banking systems. While banks can't lend ad infinitum, we believe that there are three interrelated trends unfolding in the banking system."

The study listed the trends as follows:

First, banks are more risk averse as they need to take stock of the high and often exuberant lending growth they have had over the past year and a half.

Second, banks want to observe the private sector's ability to meet its obligations. (In some instances, we believe that banks are more stringent than they need be, though this is by no means certain.)

Third, private-sector borrowing appetite is decreasing as the sector is gauging the economic climate and is not isolated from the vagaries of the global economic crisis.

"We are not of the opinion that banks are failing to lend because banks have run out of money.

"This is the false assumption and a misinformed one. Actually banks' deposits with Sama in December have jumped to SR41.1 billion from just SR930 million in October, mostly in the form of reverse repo transactions with the central bank," it said.

"Some could argue that what could help private borrowers now would be a commensurate drop in the cost of funding, as spreads have widened. Others would say that wider spreads represent some embedded higher risk premium and a lower profit margin made by bank deposits the money market."

The study noted that during the second half of 2008, Saudi banks were re-pricing most of their facilities upwards, as the cost and supply of funding were decreasing.

"Price stickiness in funding is an issue that private-sector actors express in our meetings with them. We think that sustaining loan growth and appetite in 2009 at the pace of 2008 will not be possible, given that the risk matrix has changed for both borrowers and lenders alike," the study said.

"Lending appetite could be winding down as banks become liquid. We notice that businesses continue to be less optimistic about the lending attitude of banks in the kingdom."

WHAT DO YOU THINK? What measures can the regional banks take to raise funds? Have your say by posting a comment below, or emailing us at online@business24-7.ae.