Gulf banks are treading firmly towards full recovery in 2010 to exit one of their most turbulent financial periods brought about by the global fiscal turmoil and regional family business debt problems, according to analysts.

Many of the more than 150 banks in the GCC have either reeled under losses or recorded lower income over the past 15 months in a sharp contrast with the previous two years, when most of them basked in one of their most profitable eras, they said.

With a build-up in their bad debt provisions and government support, the banks are expected to return to profit growth in 2010, when oil prices will likely improve further and regional economies revert to growth after suffering from a contraction in 2009 for the first time in nearly seven years.

"If you ask me about next year, I can assure you that it will be a stable year and a return by the GCC companies, particularly banks, to pre-crisis profitability," said Zuhair Kiswani, Director of the Sharjah-based Al Sharhan Securities.

"I can cite several factors for this. They include the expected recovery in regional economies, an increase in oil prices, a sharp rise in the banks' provisions and government support for the financial sector. Without such support, the crisis could have dragged on for five to 10 years but they have cut it to two years," he said.

Releasing their quarterly results, many banks in the 28-year-old Gulf economic, defence and political alliance have reported lower profits while others recorded only a slight increase in earnings. Bankers blamed slackening domestic demand, lower credits by banks and allocation of a big chunk for their income for provisions because of the Saudi Saad and Algosaibi default problem.

In the UAE, which has the largest banking sector in the Arab World, such factors depressed the combined net earnings of its national banks by nearly 16.3 per cent in the first nine months of 2009, according to their balance sheets.

The balance sheets of 19 national banks listed on the official bourse showed their combined net profits dipped to around Dh15.687 billion in the first nine months of 2009 from about Dh18.743bn in the first nine months of 2008. Their earnings also slumped by nearly 11.6 per cent to Dh4.831bn in the third quarter of 2009 from Dh5.47bn in the third quarter 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 contrast to the first nine months of 2008, whereby investment provisions drove the scene, the provisions till date are primarily attributed to the spike in credit provisions by 281 per cent, according to the Saudi Jadwa Investments.

Credit tightness

Like other banks in the Gulf and outside the region, Saudi Arabia's banks have been jolted by the Saad and Algosaibi crisis at a time when they were struggling to recover from the debilitating effects of the global credit tightness. In the second quarter, Saudi banks chopped off a big chunk of their income to allocate nearly SR1.4bn (Dh1.38bn) for bad loan provisions.

While most of them have not disclosed the exact degree of their exposure, the debt could be as high as billions of dollars and this will force the banks to keep up provisioning at the expense of their net earnings.

In Kuwait, the net profits of the nine local banks plunged by nearly 63 per cent to about KD330 million (Dh3.9bn) in the first nine months of this year from nearly KD894.8m in the first nine months of 2008.

Independent reports in Qatar showed the combined earnings of its banks and other listed companies shrank by around 13 per cent in the first nine months.

In Oman, the net income of its commercial banks fell by about 6.89 per cent in the first nine months of 2009 due to high bad loan provisions and slower credit growth, the Central Bank of Oman said in its monthly bulletin.Its figures showed the net income of those banks stood at around KD194m in the first nine months of this year.

Estimates by Bahrain's Alwaqt newspaper showed the combined net profit of the seven commercial banks listed on the Bahrain bourse dipped by around 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.

"GCC banks have managed to avert heavy losses from the global crisis given the balance between their internal activities and foreign investments. Most of the losses reported by some regional banks were a result of their external investments not domestic operations," said the Emirates Industrial Bank (EIB).

"We believe that the GCC banks and other financial institutions have started to regain their health gradually following their decisions to build up large provisions and consolidate their financial position. It is now expected that these banks will fully recover in 2010 and this will usher in a new stage for the financial system."

In its monthly bulletin, the government-controlled EIB urged regional nations to coordinate their efforts to devise a new common banking policy to enable national banks to face any fresh crisis in the global financial system. It said GCC banks should also learn lessons from the crisis to stick to known investment standards and shun derivatives and other high-risk instruments.

Co-ordinated efforts

"Although the GCC central banks have somewhat sought to co-ordinate their efforts after the crisis, they are now required in the recovery period to expand this co-ordination and double their efforts to support this recovery. The GCC monetary authorities are urged to devise new banking policies that will open a wider horizon for financial and banking co-operation in the region," EIB said.

Analysts said an economic recovery in the GCC would strengthen domestic demand and this would have a positive impact on the performance of banks and other companies in the region. They said the economies of the three largest GCC economies – the UAE, Saudi Arabia and Kuwait – have contracted in real terms in 2009 after recording high growth in 2008.

"There is no doubt the improvement in the economic situation in the GCC will positively effect the operations of banks and other companies," said Ziad Dabbas, financial adviser at the National Bank of Abu Dhabi.

Forecasts by the International Monetary Fund and other global institutions showed the GCC's real GDP would rebound by 3.3 per cent in 2010 compared with a minimal growth of 0.1 per cent in 2009 and as high as 7.1 per cent in 2008.

Individually, Saudi Arabia's GDP is projected to shrink by 1.2 per cent this year and recover by three per cent in 2010 while the UAE economy could slip by one per cent and rebound by two per cent during the same period.

Kuwait's GDP is expected to decline by 1.5 per cent and expand by around two per cent while that of Qatar is estimated to surge by nine per cent this year and around eight per cent in 2010 because of its massive gas exports.

The economies of Oman and Bahrain, which are less reliant on oil sales, are projected to grow by three and 1.5 per cent in 2009 and around four and 1.5 per cent respectively in 2010, according to the Washington-based IMF.

Inflation in the region is also expected to fall despite the economic recovery and strengthening domestic demand, with the combined GCC rate plunging to an estimated 3.2 per cent this year and 3.4 per cent in 2010. This compares with as high as 11.1 per cent in 2008.

The IMF and other reports based their projections on the fact that oil prices are expected to average around $70 a barrel in 2010 compared with $60 in 2009. Global oil demand is also expected to rise next year and this could prompt the GCC countries and other producers to lift output.

"With the exception of a few banks, the GCC financial sector has so far coped with the global financial crisis relatively well. Financial soundness indicators constructed from aggregate country data suggest that GCC banks remain solvent and profitable with system-wide capital and liquidity cushions that are helping them weather financial turmoil," said the Institute of International Finance (IIF), which groups major banks from the US and other Western nations.

Solid performance

"This is largely due to solid economic performance over recent years, that helped strengthen balance sheets, stronger regulation, and high government participation in banks, mainly in the UAE. While banks remained profitable in the first half of 2009, consolidated net profits have fallen notably in stark contrast to the strong growth in profits over recent years."

The Washington-based IIF said although reassuring, financial soundness indicators have limitations, including that they are often backward looking.

In addition, system data can mask the deterioration in financial conditions of individual banks, it said, adding that overexposure to real estate and highly leveraged companies has eroded asset quality.

It expected that uncertainty over the true state of balance sheets, especially in light of revealed exposures of the two Saudi conglomerates compounded by inadequate transparency, will likely persist over coming months, restraining bank funding and credit growth but it added that the risks will be manageable.

"Significant progress in prudential regulation and banking supervision has been made in the region, but there is still scope for further improvement. The importance of this issue stems from the lack of transparency against the backdrop of the prevalence of large conglomerates, offshore and regional banking. This requires enlarging the information set available to supervisors, including off-balance-sheet operations of banks, household indebtedness, real estate prices, and gathering information on the health of corporates," said IIF.

"Besides regular on-site inspections, stress tests can provide early warning signals. The banking sector in the GCC played a central role in the rapid growth during the boom years between 2003 and 2008, and it holds a key to the speed of recovery from the current crisis," it added.

 

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