GCC banks set to ease lending this year on improved outlook

Gulf banks are expected to ease a tight lending noose they formed in late 2008 and through 2009 as they appear to be treading into a better year in terms of economic growth and domestic demand, according to analysts.

Barring unexpected developments, banks in the six-nation Gulf Co-operation Council (GCC) will be tempted by better business environment in 2010 to partly open up their funds to the public but they will not be as generous as in 2008.

Credit activity by more than 150 banks in the 28-year-old economic, political and defence alliance could still be relatively tight in the first half of 2010 but is expected to pick up in the second half, the analysts said.

"I expect lending activities by the GCC banks to improve in 2010. I am not saying it will be as in 2008, which was an exceptional year, but it will be better than in 2009," said Mohammed Asumi, a Gulf economist based in Dubai.

"The banks will take advantage of an expected improvement in the business environment in the region because of an economic recovery and rebounding domestic demand. In the beginning, they will be relatively tight but there will be a change in this policy and banks will resume normal lending in the second half."

Official figures showed 2009 was one of the toughest years for GCC banks in terms of performance, lending and other activities because of the repercussions of the global fiscal turmoil and the debt default crisis involving the Saudi Saad and Algosaibi family business conglomerates. Banks further tightened their lending noose after sharp fluctuations in the region's stock markets and a downturn in the real estate sector.

The year 2009 was in a sharp contrast with 2008, when loans by the GCC banks and other financial institutions recorded one of their highest growth rates before plunging in the last quarter as a result of the global crisis.

But 2008 remained one of the best years for the banks in terms of lending operations and performance, with many banks recording a sharp rise in loan-to-deposit ratio and some of them even having loans climbing above deposits.

UAE's banking sector

In the UAE, which has the largest banking sector in the Arab World, resident credits by its 24 national banks and 28 foreign units jumped by around 48 per cent during that year from Dh626.6 billion at the end of 2007 to nearly Dh924.3bn at the end of 2008. Although loans picked up in the second half of this year, they were sharply slower this year than in 2008, growing by around 11 per cent in the first 11 months of 2009, according to the Central Bank, which put total credits at around Dh1.02 trillion at the end of November.

"Recent events are likely to weigh on the UAE banking sector where lending activity is already weak. Recent data suggest annual loan growth will be about five per cent this year, down from over 38 per cent in 2008," the Saudi American Bank Group (Samba) said in a recent study on the UAE banking sector. "By the second half of next year, we should see a revival as the impact of higher public spending and improving global economic conditions feed through."

According to Samba, deposits with the UAE banks have started to build again in September and October, but will probably grow by only around 8.5 per cent for the year as a whole against 29 per cent in 2008.

"As a result, banks are likely to enter 2010 with an aggregate loan to deposit ratio of around 104 per cent, still above the central bank limit of 100 per cent."

Saudi Arabian private sector

In Saudi Arabia, figures by its central bank, the Saudi Arabian Monetary Agency (Sama), showed the combined credits provided by the kingdom's 12 commercial banks grew by only around 0.9 per cent in the first 10 months of 2009 to reach about SR751.2bn (Dh743bn) at the end of October.

In 2008, they leaped by nearly 25.2 per cent SR744.8bn at the end of the year from SR594.8bn at the end of 2007.

"The uptick in private sector credit growth noted for August, proved to be something of a false dawn, and growth softened again in the following two months, recording a new low of one per cent for 12 months to October. Private sector credit growth was growing at a double-digit rate as recently as April, but has been on a sharp downward path," said Samba. It cited several factors for the slackening credit growth, including the withdrawal of many international banks from Saudi Arabia and other emerging markets.

While it has never been as reliant on international finance as some other Gulf countries, the withdrawal of global banks from the region has clearly had an impact on project funding in most regional states, it said.

Another factor is that banks are taking a harder look at industrial projects given feedstock constraints and a still-poor export environment, said Samba.

Banks are also more cautious about projects and firms that depend on domestic retail demand, which remains brittle, said the report.

A third factor is that the fallout from the debt default problems afflicting the Saudi Saad and Algosaibi family businesses "continues to reverberate".

"The scale of the problems was a shock to the banks, and has led them to take a more proactive approach with their existing clients to identify any potential debt stresses. It has also further curbed appetite for fresh lending," said Samba.

Other GCC countries

In Kuwait, which has the third largest banking sector in the Gulf, credits by the emirate's banks soared by around 24.8 per cent through 2008 but growth sharply slowed down to just 5.5 per cent in the first 10 months of 2009. Loans by Qatar's banks leaped by about 51 per cent in 2008 but growth stood at only about 4.5 per cent in the first seven months of 2009.

In Bahrain, credits by its retail banks jumped by about 40.7 per cent in 2008 but growth dipped by nearly 2.3 per cent in the first 10 months of 2009. After swelling by around 42.2 per cent, growth in credits by Omani banks plunged to just 5.3 per cent in the first 10 months of 2009.

"GCC banks had one of their busiest lending periods in the first half of 2008 but activity sharply slowed down in the second half of that year because of the crisis and the fact that many international banks stopped their funding operations in the region," said Humam Al Shamma, a financial adviser at the Abu Dhabi-based Al Fajr Securities, a key UAE financial and brokerage firm.

"In 2009, the situation was an extension of the second half of 2008. Some banks tightened lending to bridge the widening gap between loans and deposits while others adopted a cautious policy because of concerns about risks resulting from the downturn in local markets and real estate sectors. In 2010, I think the banks will partly stick to this cautious lending policy in the first half and some of them are expected to be more selective in terms of loans to sectors. In the second half, we might see gradual improvement."

Lower income

The slowdown in credit allied with an intense bad debt provisioning drive and other factors to depress the earnings of most GCC banks in the first nine months of 2009 although their performance through the year could be similar to 2008, when the combined income of GCC banks stood at $19.2 billion (Dh70.52bn).

Official data showed the combined profits of 19 national banks in the UAE dropped by over 16 per cent to around Dh15.687bn in the first nine months of 2009 from about Dh18.743bn in the first nine months of 2008.

Saudi Arabia's banks also reported a decline of around 7.3 per cent in their net earnings in the first nine months because of high provisioning and the negative contribution of non-asset based fee income.

In Kuwait, the net profits of the nine local banks plunged by nearly 63 per cent to around KD330 million (Dh3.9bn) in the first nine months of this year from nearly KD 894.8m in the first nine months of 2008.

The net income of Qatari banks and other listed firms shrank by around 13 per cent in the first nine months while in Oman, profits of its banks fell by about 6.89 per cent. Official data in Bahrain showed the combined net profit of the seven commercial banks listed on the Manama bourse dived by about 38 per cent to BD156.1m (Dh1.5bn) in the first nine months of 2009 from BD251.56m in the same period of last year.

Slow credit

"Private sector credit in the GCC stagnated, reflecting both a reduction in the supply and the demand for credit given the uncertain macroeconomic environment. Private credit growth could decelerate to less than four per cent in 2009 from 30 per cent in 2008," the Washington-based Institute of International Finance (IIF) said in a recent study about the GCC economies.

"Until the real estate sector and investment companies show improved operating environments, credit risk concerns are likely to weigh negatively on many banks' financial profiles over the few months ahead."

It said a number of factors contributed to the sluggish private sector lending in the region in the first eight months of 2009.

"First, banks were cautious about corporate growth prospects in an environment of weak domestic demand. Second, the global financial crisis has generally encouraged most banks around the world to refocus on risk management. Third, new private sector projects coming to the market dwindled this year, as a number of projects were put on hold or cancelled."

But the report stressed GCC banks remain strong and profitable with system-wide capital and liquidity cushions that are helping them weather financial turmoil.

"This is largely due to solid economic performance of the banks over recent years, that helped strengthen the banks balance sheets, stronger regulation and high government participation in banks."

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