UAE and Saudi Arabia lead GCC in healthy bank deposits

The UAE and Saudi Arabia maintain the lead by posting healthy levels of deposits in the region despite the drop in deposits across the banking sector in the GCC, according to a new report by Kamco Research.

Saudi Arabia's banks, even after the recession, hold the largest deposit base among its GCC peers with a percentage contribution of about 38 per cent of total GCC deposit base or about $283 billion (Dh1.03 trillion) as of September 2009.

The banking sector in the UAE followed with a percentage contribution of 30 per cent (deposit base of $221bn), while Kuwaiti banking sector maintains its third largest position with a percentage contribution of total deposit base in the GCC region of 17 per cent, equivalent to $124bn as of September, as per the data mentioned in the report.

Prior to the global economic slowdown, the GCC banking sector continued to post solid growth in its deposit base in line with the banks' expansion strategies across the region in attracting further customers and augmenting its capital size.

"Consequently, total deposits registered a CAGR of 27 per cent over the period 2004-2008, with the highest yearly growth of 38.6 per cent reported in 2007 to stand at $604bn compared to $436bn and $282bn registered at the end of 2006 and 2005 respectively."

Good economic growth in the region during that period, along with the increased oil prices, availability of liquidity in the market, high yield on deposits offered by banks to increase its deposit base and in turn increase its loan portfolio to boost its interest income increased bank deposit.

This growth continued even in the fourth quarter of 2008, when the global problems began hitting the region. "Given the market financial conditions mainly in Q4-2008, aggregate deposits with the GCC banks grew by 20 per cent y-o-y, to stand at $724.7bn at the end of 2008."

However, the growth slowed down in 2009 and the report said that total deposits' growth stepped up during 9M-2009, to reach $740bn as of September, growing by a marginal 2.1 per cent compared to December 2008. The main reason behind the growth in deposits in 2008 was investors' reluctance to go for risky investments.

Growth in total deposits during 2008 was mainly spurred by investors' lack of confidence in the stock market where risk has been elevated due to the high fluctuations in asset prices triggered by the financial and credit turmoil, which hit the global financial system, and hence investors preferred low-yield bank deposits as an alternative to risky investments in the stock market, said the authors of the report.

However, with the intensification of the crisis and the liquidity shortage that prevailed in the market, total deposits continued to grow yet at a drastically lower pace.

As far as the loan portfolio of the GCC banking sector is concerned, net loans and advances extended by the banking sector in the GCC region posted a solid and healthy growth over the period 2004-2008. They grew at a CAGR of 32 per cent, hence indicating the consistent and significant upward trend in the loan portfolio of all the banking sectors in the GCC, with no exception, that had been witnessed over the same period.

"All the countries have witnessed a sustainable growth in their banking sectors' loan portfolio over the period 2004-2008 with the highest growth being noticed in Dubai and Qatar as banks' loan portfolios grew over the same period at a CAGR of 65 per cent and 47 per cent respectively," it said. Again, this increase in credit is attributed to the high years of growth prior to the slowdown.

"Economic boom that the GCC countries have enjoyed over the past four years supported by the rally in oil prices along with ample liquidity in the credit market and significant appreciation in the price of financial assets and the increasing interest in the property market, which pushed prices upward to unprecedented levels", pushed up lending levels, said Kamco report.

The data revealed that the banks' aggregate loan portfolio surged 30.4 per cent during 2008 to $609bnas of December 2008.

However, amid the intensification of the global financial meltdown and credit turmoil during Q4-2008 and 9M-2009, all banks in the GCC became more willing to give credit.

Tight credit policies were put in place due to an increased risk of defaults by huge conglomerates. "Such situation has led to a sharp slowdown in the growth of loan portfolio which stood at $622bn as of September 20, 2009, growing by a mere 2.1 per cent during 9M-2009," according to the report.

The breakdown of loans among the six GCC countries shows that as of September 30, 2009, the UAE banking sector had the biggest share with a 34 per cent market share of loans, equivalent to a value of $213bn.

This was followed by Saudi Arabia, with a percentage contribution to loans of 33 per cent or around $207bn. The Kuwaiti banking sector was the third largest sector by the size of its loan portfolio with a market share of 16 per cent or around $98bn.

The report reveals that loans extended by banks in Dubai witnessed the highest growth rate over the period 2004-2008 to grow at a five-year CAGR of 65 per cent; loans surged from $14bn at the end of 2004 to $102bn as of December 2008.

But no growth had been noticed in the 9M 2009 mainly due to an increasing default risk. Flight of international capital along with the slump in property prices and the devaluation of financial asset prices and the slump in the stock market added to the lull period of growth. On the other hand, in Qatar, the aggregate loan portfolio of the country's banks grew at a healthy CAGR of 47 per cent over the same period too reach $60bn as of December 2008.

"The economic boom along with the government's huge spending on infrastructure and real estate projects fuelled the demand for credit.

Despite the notable slowdown of credit expansion during 9M-2009, the Qatar Government is expected to maintain its capital spending on health, education and transport that will act as a catalyst for the credit growth over the coming few years," it said.


Loan-to-deposit ratio

The loan-to-deposit ratio, set by central banks in the GCC, varies among countries and plays a vital role in the lending policy of commercial and Islamic banks.

In Abu Dhabi, the loan-to-deposit ratio as of September 30, 2009 has exceeded the mandated level set by the UAE Central Bank, which is currently at 100 per cent.

Loan-to-deposit ratio for the banking sector in the Abu Dhabi emirate continued its upward trend over the past two years to reach a maximum of 102 per cent as of September up from 101 per cent and 92 per cent at the end of 2008 and 2007 respectively.

This significant increase in the loan-to-deposit ratio has been fuelled by the growth in credit to finance real estate sector and the infrastructure projects along with the low growth rate in deposits over the same period.

The surge in loan-to-deposit ratio during 2008 is mainly explained by the 32 per cent increase in credit facilities versus a 26 per cent increase in deposit base with banks.

Fuelled by the economic boom in the country, Qatari Banks have also exceeded the limit set by the Central Bank of Qatar, which currently stands at 90 per cent, by around 1100 basis points.

On the other hand, banks in Saudi Arabia enjoy the lowest loan-to-deposit ratio which recorded 73 per cent as of September 30, 2009 compared to a ceiling of 80 per cent set by the Saudi Arabian Monetary Authority.

This low ratio gives the banking sector in Saudi Arabia an edge to expand its credit portfolio.

The emirate of Dubai and Kuwait both enjoy a room to extend additional credit of $10 billion (Dh36.7bn) and $8bn without breaching the limit for loan-to-deposit ratio set by the central banks in both countries, which stand at 100 per cent (for Dubai) and 85 per cent (for Kuwait).


- Information from Kamco Research

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