The GCC banking sector's profits are set to increase between 10 per cent and 15 per cent this year despite the global economic slowdown, says Raghavan Seetharaman, CEO of Doha Bank.
The banks will achieve this growth because of the strong fundamentals of the region's economies. He said the sector would not in the near future match the profit growth rates of up to 40 per cent seen when the markets were rising.
"However, the regional banking sector will overcome the current market conditions and move forward at a slower pace due to the ability of regional economies to register real growth, while the rest of the world is facing recession," he told Emirates Business.
How do you assess the outlook of the GCC banking industry?
The extraordinary rates of profit growth of 30 per cent or 40 per cent that GCC banks achieved when the capital markets were going up will not be seen again in the near future. GCC banks will have to behave according to normal rules, which mean that their profitability should be in line with the performance of the economy.
The good banks in the GCC will be able to achieve around 15 per cent to 20 per cent growth in return on equity in 2009, or 1.5 per cent or two per cent growth in return on assets. I do not think the banks can make more than this at the present level. The risk management and rationalisation processes will dictate the situation. GCC banks will continue to grow because the fundamentals of the regional economy are strong, but they will not have bumper growth. If they could achieve 10 per cent to 15 per cent growth it would be great. The GCC surplus in oil revenues is expected to decline to $300 billion (Dh1.1 trillion). However, this will guarantee that government projects will continue, while private projects, which are financed by international institutions will face problems.
What are the main factors affecting the regional banking sector?
The sector is still solid because most of us operate according to Basel II regulations. We have clear risk management systems and adequate capital. We do not have high exposure to sub-prime loans – less than one per cent of the total assets, according to disclosures by regional banks. However, 2009 will be a year of consolidation and optimisation. We have to slow down in terms of real estate lending. The critical issue is the increasing speculation in stock markets and the real estate sector this is gambling not investing. If you look at the real economy, even the finances of listed companies in the stock markets, you will find strong fundamentals, but the markets are still taking a beating.
However, I think GCC markets have reached the bottom and there are strong signals that they are stabilising. I expect the markets will return to normal trading during the next quarter. The sudden shock of the financial crisis paralysed global financial institutions as every bank reacted with fear.
In regional terms, we will shake off this fear in 2009. The banking sector has started to obtain more liquidity to lend to their clients. However, the pace will be slow because banks will not be able to provide finance as long as they cannot borrow from the international market.
What is your view of the measures taken by GCC governments to ensure there is liquidity in the market?
Inter-banking lending is starting to pick up again in the region. In local market terms, inter-bank pricing has started to decline slightly after doubling during the last few months. This is a result of efforts by individual central banks in the region to ensure that there is no liquidity crunch in their markets.
The central banks of every GCC member-country took important measures.
In the UAE, the Central Bank and the government pumped in Dh120bn so that banks had access to more liquidity.
The intra-GCC situation is opening up slowly as the banks have started to lend to each other, but in limited areas. Outside the region, there is no liquidity as international banks are not offering money because the global market is still on hold.
This is happening in both directions because banks are not willing to take risks. International banks are not coming to the region and GCC banks are not placing money with European, United States or Asian banks.
We are holding tight because everything is interlinked to the global economy, everyone is waiting for full information before taking decisions. The banking industry is global in its nature. We cannot look at the GCC in isolation because every bank is interlinked with the rest of the world.
We see international banks with strong global spreads facing problems in terms of lending or investing, and this will affect regional and local banks. However, banks that have confined themselves to the GCC are safe because the economies here are safe. At Doha Bank, I will not mind lending to good GCC banks.
What do you think of the increasing calls for mergers among Gulf banks to create stronger entities?
Doha Bank is ready to expand in the region but not in the current conditions. Mergers and acquisitions need scale at any time and this is not a good time. This is a time to clean up your own home and then look at consolidation or mergers. In normal circumstances increasing the scale of operations is a positive move because it leads to higher profits and lower costs. Now the issue is to run your own institution instead of looking at others. The new world financial order will need more risk management and governance within individual banks to make sure there is a proper assessment of liquidity, productivity, profitability, market risk, institutional risk, currency risk and many other areas. So it is better for each bank to focus on its core business and its profitability and productivity. The current issues in the banking sector concern the future of some banks, but taking over this responsibility would be destructive for good banks, who should concentrate on ensuring their own survival.
How do you assess the new world economic order?
The global economy is at a critical phase. The real economy will stay as strong as ever but will have a new regulatory framework. The Americas, except Brazil, is expected to grow by less than one per cent in 2009.
Western Europe is expected to grow by less than two per cent. The Middle East, Eastern Europe, sub-Sahara Africa and India are projected to grow by six to seven per cent, while China will grow by seven to eight per cent. The Asia-Pacific countries will grow by four to five per cent. This projected economic growth reflects a re-alignment in the global economic order. The stock markets, commodity markets and real estate market have come down, reflecting the world recession.
During the time of high growth there was increasing inflation and now there is the reverse, there is deflation. It is similar to a global infection moving from one area to another. The credit crunch started in the US then infected the whole world.
What changes do you expect to see in the global financial industry?
There is a need for new policy frameworks involving intervention by political leaders on a global scale to revive the operations of crippled financial institutions.
The global banking industry should adopt the Basel III regulations to remove negative aspects of Basel II. For example, Basel II does not cover liquidity issues and there should be new rules for such areas.
There is a need to fine-tune conventional credit and liquidity ratios. We also have to move from corporate governance to global governance by having a worldwide regulator for the financial industry under the United Nations or a global financial organisation.
We have a severe lack of integrated global governance in the banking industry, which is a global industry regardless of whether an individual bank operates on a local, regional or international scale.
So we need a single regulatory system for the industry. Also there is a need for global participation by governments in financial institutions. I do not mean that governments should take over the banking sector or some banks, as has happened in the US and European countries.
I mean that governments should hold a stake in all banks to ensure sound governance, accountability and good management. This would play a major role in increasing public confidence in the system. India took this step in 1969 and the government now has a stake in most of the banks.
We have seen banks, stock markets, the real estate sector and car manufacturers being hit by the crisis – what will be affected next?
What next is a difficult thing to identify, but any sector that is excessively leveraged is in a bad situation.
The global banking industry has excessive leverage in the credit card segment, consumer loans and some other areas. The extent of the problem will depend on the situation in different regions.
Credit cards could be a major issue in the West but the situation is different in emerging markets. People should learn to live according to their means. Also, banks should move towards ethical financing.
PROFILE: Raghavan Seetharaman CEO of Doha Bank
Seetharaman is a chartered and cost accountant and has certificates in corporate management. He occupied senior management positions at a number of banks in Oman before joining Doha Bank as Assistant General Manager. He became CEO in September 2007.
Seetharaman won the Best Arab Asian Banker Award 2006 at the Arab Asian Forum held in Singapore on the margins of the International Monetary Fund's annual meeting.
He was presented with the Best Banker Award for 2007 by Banker Middle East magazine.