Economic revival, improved oil prices to boost GCC bank profits

Net income for the sector projected to grow 15%. NPL provisions likely to rise 23 per cent in the UAE to nearly $4.8bn this year. (EB FILE)

Banks in the six-nation Gulf Cooperation Council (GCC) economy are expected to return to profit growth in 2010, benefiting from higher oil prices and a sharp recovery in regional economies because of expanding public spending and rebounding confidence, analysts said.

After five successive turbulent quarters in the aftermath of the global fiscal tremor, more than 150 banks in the GCC states will likely perform better than in 2009 as they push ahead with plans to gradually reopen their tight lending taps, they said.

Although credit growth in the region, hit by the global crisis and debt default problems, is still slow, lending is anticipated to begin picking up in the following months as banks are likely to be enticed by a better economic environment, growing domestic demand and a consolidation in their financial position because of heavy provisioning.

But experts believe that banks will remain relatively cautious and their recovery will be slow on the grounds that provision-taking will continue.

After dipping to around $60 (Dh220) a barrel last year from highs of $95 a barrel in 2008, oil prices are projected to rebound to an average of $76 per barrel this year. This should ally with an increase in public expenditure to spur on growth and encourage banks to lend.

Figures by the Saudi American Bank Group (Samba) showed that oil prices at $75 a barrel this year, would be nearly 20 per cent higher than in 2009 while government spending is already higher by two per cent as compared with the 2009 expenditure in the UAE, 3.7 per cent in Saudi Arabia, three per cent in Kuwait, 18 per cent in Qatar, six per cent in Oman and around two per cent in the kingdom of Bahrain.

Sluggish recovery

"I believe 2010 will be a year of slow recovery for GCC banks as more provisions will have to be taken by some and others will have to consolidate their business. Risks will have to be re-evaluated and banks will be more cautious, both in the retail and corporate segments," John Sfakianakis, Senior Economist at Banque Saudi Fransi, told Emirates Business.

"Hence I expect a slow recovery in overall bank lending, characterised by conservative lending growth and appetite from the business side. Those banks that are exposed to the real estate sector will not find it so easy. What is encouraging is that systemic risks have been avoided and central banks have been supportive at the right moment with additional liquidity."

A new report due to be issued by Samba shortly that was made available to this newspaper this week, observed that despite strong government intervention and support to banks, domestic credit growth fell sharply in the GCC during 2009 as liquidity tightened in response to the global credit crunch and banks became increasingly risk adverse in the face of rising non-performing loans (NPL) and deflated asset prices.

Its figures showed tighter bank lending conditions, combined with corporate and individual deleveraging, caused annual credit to drop to low single-digit growth in all states except for Qatar, where credit grew by 14.3 per cent.

Promising outlook

"The outlook for banks in 2010 is more promising as GCC governments spend increasing oil revenues and capital inflows improve – although bank access to international wholesale funding markets may remain tight until the second half of the year.

"Against a stronger economic backdrop, confidence and risk appetite should also recover. GCC banks start 2010 well-capitalised and well-provisioned providing a sound basis for growth," said Andrew Gilmour, Senior Economist at Samba, one of the largest banks in the kingdom.

Samba's estimates showed domestic bank credit sharply slowed down in the GCC in 2009, with growth dipping from 27 per cent in 2008 to negative in 2009.

In the UAE, growth tumbled from 38.4 per cent to 2.3 per cent while it dived from 16.7 per cent to 6.3 per cent in Kuwait. It also dived from 51 per cent to 14.3 per cent in Qatar and about 42.3 per cent to 7.2 per cent in Oman. No figures were provided for Bahrain.

GCC banks suffered from one of their most turbulent periods during the past 15 months because of the repercussions of the global crisis and regional bad debt crises. Most of them have tightened their credit activities and have mounted a drive to build up a large provision base in anticipation of fresh debt problems.

As a result, their net income has been adversely affected despite a relatively good performance. Some of these banks have even reported losses as record allocations for NPL provisions took their toll on profitability.

Banking estimates showed that net profits of national banks in the UAE grew to an approximate $5 billion in the first nine months of 2008 from $3.5bn in the same period of 2007 before dipping to $4.3bn in the first nine months of 2009.

New operating environment

Combined net earnings of banks in Saudi Arabia slumped from $6.3bn in the first nine months of 2007 to $6.1bn in the first nine months of 2008 and continued their fall to reach about $6bn in the same period of 2009.

Kuwaiti banks reported a rise in profits from $2bn to $3.2bn during 2007-2008 but income plunged to an about $1.1bn in the first nine months of 2009. Profits by Qatari banks grew from $1.7bn to $2.1bn before slipping to about $2bn in the same period.

Those of Omani banks increased from $280 million to $295mn but dipped to about $290m. The net income of Bahraini banks tumbled from about $800m to $200m in the first three quarters during fiscal 2007-2008 before recovering to nearly $300m in the first nine months of 2009.

"Overall, 2009 witnessed the emergence of a new operating environment that is set to pressure banks' performance over the medium term, force a change in their business models and heighten their focus on risk management as well as risk aversion to levels not seen before," National Bank of Kuwait (NBK) said.

Squeeze on margins

"In addition, central banks are enhancing their supervision and adopting tighter regulatory standards. On the other hand, GCC banks are set to benefit from an improvement in the economic and business environment as well as continued government support this year…with clean balance sheets and higher provisions already in place, the anticipated performance and indicators of GCC banks in 2010 and over the medium term are expected to improve relative to 2009, though more barriers and risks are expected on the road to recovery," it added.

While profits are expected to show solid growth, albeit at a slower pace than that seen in previous years, they will nonetheless be affected by the relative squeeze on margins, NBK said in a study on the GCC banking sector. "Our forecasts are based on the reasonably solid economic outlook for the region, developments that have taken place in GCC banks' balance sheets and financial indicators since the onset of the crisis, and the demonstrated strong commitments of GCC governments towards supporting domestic banks," it said.

"By way of summary, and despite their strong integration with global financial markets, the overall impact of the global crisis on GCC banks has been relatively limited and appears to be fading…and though some risk may remain for individual banks, the GCC banking sector is expected to record a solid performance this year and over the medium term," it added.

In Saudi Arabia, which boasts the second largest Arab banking sector after the UAE, banks considered their performance in 2009 as good given the difficult local and global economic environment and heavy NPL provisioning. For 2010, banks here are expected to perform better on the back of higher forecasts of oil prices and domestic crude output combined with the kingdom's recently approved record budget.

"We expect net income for the banking sector to improve as provisions reduce from the peak levels of the fourth quarter of 2009…a growth of 15 per cent is possible," said NCB Capital, an affiliate of Saudi National Commercial Bank.

Domestic scenario

In the UAE, banks remained tight through 2009 and early 2010 despite a surge in liquidity while record provisions depressed the income of many banks. Banking estimates showed the UAE banks allocated the highest NPL provisions in the GCC in the first nine months of 2009, standing at about $2.2bn. In comparison, NPL provisions stood at nearly $1.7bn in Kuwait, $1.6bn in Saudi Arabia, an approximate $300m in Bahrain, $250m in Qatar and $200m in Oman.

Estimates by the Kuwait-based Markaz Financial Centre showed total provisions by GCC banks through 2009 stood at about $9.4bn, which was nearly 40 per cent higher than in the previous year. The report projected a rise of around 23 per cent in provisions in the UAE to nearly $4.8bn this year.

For other GCC members, provisions could rise by 31 per cent in Oman and 12 per cent in Bahrain while there could be a fall of about 30 per cent and 46 per cent in Saudi Arabia and Kuwait respectively, said Markaz.

In the first nine months of 2009, Qatari banking sector provisions jumped seven-fold to around $229m, the report showed. It expected provisions in the fourth quarter to be equivalent to those in the third quarter of 2009, brining the total provisions to nearly $340m through the year.

"In the UAE, by the second half of this year, we should see a revival of credit growth as the impact of higher public spending and improving global economic conditions feed through," Samba said in a study on the UAE.

Boost from higher oil prices

According to regional forecasts, an expected improvement in oil prices will likely boost the GCC's combined GDP by around 5.1 per cent in 2010 after growth in 2009 fell to its lowest level in nine years. Citing its own forecasts and International Monetary Fund estimates, Samba said growth would be triggered by a 20 per cent rise in crude prices and higher public spending.

"Although there appears to be limited scope to raise production, oil revenues will still rebound strongly in 2010 in line with the projected 20 per cent increase in prices. Total GCC hydrocarbon export earnings are projected to rise by close to $64bn above the 2009 level," Samba said.

It said this rise would expand current account surpluses in the region and allow for sustained fiscal surpluses despite still strong public spending plans.

It, however, excluded Saudi Arabia which, it said, could suffer from a budgetary deficit of about 2.8 per cent of the gross domestic product (GDP) because of a surge in expenditure.

"While real growth in the GCC oil sector will be constrained by the Organisation of Petroleum Exporting Countries (Opec) output quotas, there will be a positive impact as output creeps up and from new investment activity in the hydrocarbons sector," the report added.

"Without the drag of falling oil output as experienced in the past year, sustained growth in the non-oil sector is expected to be reflected in a sharp recovery in GCC real GDP growth to over five per cent in 2010."

According to an Arab League institution, higher oil income will boost the GCC's financial reserves by nearly 15 per cent to $640bn at the end of 2010 from an estimated $557bn at the end of 2009 and $534bn at the end of 2008.

The UAE's reserves are projected to rise from $35.9bn in 2009 to $51.5bn in 2010 while those of Saudi Arabia, including Saudi Arabian Monetary Agency's (Sama's) assets, would surge to $540.8bn from $479.8bn in the same period, according to the Kuwaiti-based Inter-Arab Investment Guarantee Corporation(IAIGC), which also forecast increases in the reserves of all other GCC member states.

 

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