Worst is over for GCC banks and economies, says report

Gulf oil producers appear to have pushed their way out of the global financial crisis and are treading firmly into a healthy year for their economies and banking sector, a Kuwait investment bank said yesterday. The economies of all members of the Gulf Cooperation Council (GCC) are projected to record positive growth in 2010 while their banks will perform better this year than in the previous turbulent 15 months that followed the crisis and the collapse in oil prices, Global Investment House (GIH) said in a 100-page study. Qatar is again expected to be the star economic performer this year given its immense gas exports while its banks and those in the UAE could outpace banks in the other GCC countries, GIH said in the study sent to Emirates Business. “The GCC banking sector has witnessed turbulent times in the last five quarters starting with the impact of the global crisis, followed by the implications of the default by Saudi conglomerates Sa’ad and Algosaibi somewhere in mid-2009,” it said. “Starting 2010, the major question that lingers in the minds of investors is whether the worst is over? We believe that the GCC banks collectively have already seen the worst and 2010 will be a year of asset and profit consolidation before the banks embark on a steeper profitability trajectory in the years ahead.” The report said the economies of the GCC countries, which sit atop nearly 45 per cent of the world’s extractable crude deposits, are also expected to resume healthy growth in 2010 given steady and high oil and gas prices. It noted that the GCC countries had managed to accumulate massive financial surpluses over the past few years due to the surge in oil prices, which enabled them to “employ powerful counter-cyclical fiscal policies. With crude prices stabilising at around $70-80 a barrel, the outlook of those countries seem bright as some are expecting to post a surplus. Confidence in the GCC credit markets has also significantly improved over recent months and the doom and gloom scenarios have been priced out.” GIH said it expected massive infrastructure spending in the region to underpin fast recovery in the economy for countries like Saudi Arabia, the UAE and Qatar which have both the ability to spend and the willingness to do so as well. “The banking sector which is closely related to the economy is therefore expected to benefit in full from any such recovery, more so in countries which have implemented aggressive fiscal policies.” After an expected decline of around seven per cent in their net profits, GCC banks are projected to show a healthy 15 per cent growth in 2010 earnings. “We believe that earnings growth will pick up pace further down the road managing a 2009–2012 CAGR of 20 per cent,” said GIH. Its forecasts showed the net interest income of GCC banks is anticipated to grow by around seven per cent in 2010 over the previous year. The report noted that provisioning expenses of GCC banks jumped by nearly 64 per cent in 2009, underpinning the forecast decline in profits in 2009. “Going into 2010, GCC banks are still to feel the spillage of credit deterioration, though to a lesser extent than that seen in 2009, with collective provisioning requirements estimated to decline by 16 per cent,” the study said. “The provisioning charge [provision expense as a ratio of total income] is therefore expected to subside to 18 per cent in 2010 and to 10 per cent in 2012 after making a high of 23 per cent in 2009. As per our calculations, the NPLs ratio of GCC banks will stand at 3.1 per cent in 2009 and increase by 31bps in 2010 before sliding down by an average of 20bps till 2012.” The study said banks in Qatar and the UAE had an edge over those in other member states, with Qatari banks enjoying what it described as a slightly better asset quality and very proactive government attitude. “Interestingly, we believe that UAE banks enjoy the same stance as Qatari banks, despite the fact that they suffer from high exposure to defaulting conglomerates, high retail default and bottoming real estate prices. This is because these negatives are offset by good and steady spreads, healthy top-line and bottom-line growth expectations and due to the simple fact that UAE banks in general and Abu Dhabi banks in particular enjoy government patronage” Turning to the economy, GIH expected all GCC members to record positive real GDP growth this year on the basis of strong oil prices, high public spending and the execution of massive projects in the region. It forecast growth at around 2.4 per cent in the UAE, 3.8 per cent in Oman, 3.7 per cent in Bahrain, 3.3 per cent in Bahrain, and three per cent in Saudi Arabia. Qatar’s economy is projected to surge by 18.5 per cent as the world’s third largest gas power is pushing ahead with huge LNG ventures. “In the UAE, real GDP is expected to have fallen in 2009 by just 0.2 per cent because of lower oil prices, real estate downturn and crude output cut,” it said. In Saudi Arabia, higher oi