GCC banks eye profit growth

The days of profit growth are back for GCC banks, which had faced five turbulent years in a row.

Experts say more than 150 banks in the GCC states will likely perform better in 2010 than in 2009 as they push ahead with plans to gradually reopen their tight lending taps.

What are the factors that catalysed banks' return to good old days?

Analysts have zeroed in on three factors - higher oil prices, a sharp recovery in regional economies because of expanding public spending and rebounding confidence.

Figures by the Saudi American Bank (Samba) Group show that oil prices at $75 a barrel this year, would be nearly 20 per cent higher than in 2009 while government spending is already higher by two per cent as compared with the 2009 expenditure in the UAE, 3.7 per cent in Saudi Arabia, three per cent in Kuwait, 18 per cent in Qatar, six per cent in Oman and around two per cent in Bahrain.

The situation was dismal in 2009 when domestic credit growth fell sharply in the GCC as liquidity tightened in response to the global credit crunch and banks became increasingly risk adverse in the face of rising non-performing loans (NPL) and deflated asset prices.

Tighter bank lending conditions, combined with corporate and individual deleveraging, caused annual credit to drop to low single-digit growth in all states except for Qatar, where credit grew by 14.3 per cent.

Domestic bank credit sharply slowed down in the GCC in 2009, with growth dipping from 27 per cent in 2008 to negative in 2009.

In the UAE, growth tumbled from 38.4 per cent to 2.3 per cent while it dived from 16.7 per cent to 6.3 per cent in Kuwait. It also dived from 51 per cent to 14.3 per cent in Qatar and about 42.3 per cent to 7.2 per cent in Oman. No figures were available for Bahrain.

GCC banks suffered from one of their most turbulent periods during the past 15 months because of the repercussions of the global crisis and regional bad debt crises.

Banking estimates showed that net profits of national banks in the UAE grew to an approximate $5 billion in the first nine months of 2008 from $3.5 billion in the same period of 2007 before dipping to $4.3 billion in the first nine months of 2009.

Combined net earnings of banks in Saudi Arabia slumped from $6.3 billion in the first nine months of 2007 to $6.1 billion in the first nine months of 2008 and continued their fall to reach about $6 billion in the same period of 2009.

Kuwaiti banks reported a rise in profits from $2 billion to $3.2 billion during 2007-2008 but income plunged to about $1.1 billion in the first nine months of 2009. Profits by Qatari banks grew from $1.7 billion to $2.1 billion before slipping to about $2 billion in the same period.

Those of Omani banks increased from $280 million to $295 million but dipped to about $290 million. The net income of Bahraini banks tumbled from about $800 million to $200 million in the first three quarters during fiscal 2007-2008 before recovering to nearly $300 million in the first nine months of 2009.

In the UAE, banks remained tight through 2009 and early 2010 despite a surge in liquidity while record provisions depressed the income of many banks. Banking estimates showed the UAE banks allocated the highest NPL provisions in the GCC in the first nine months of 2009, standing at about $2.2 billion. In comparison, NPL provisions stood at nearly $1.7billion in Kuwait, $1.6 billion in Saudi Arabia, an approximate $300m in Bahrain, $250 million in Qatar and $200 million in Oman.

Estimates by the Kuwait-based Markaz Financial Centre show total provisions by GCC banks through 2009 stood at about $9.4billion, which was nearly 40 per cent higher than in the previous year. The report projected a rise of around 23 per cent in provisions in the UAE to nearly $4.8 billion this year.

The year 2009 was a turnaround story for the Bahrain banking sector given the $23 million loss sustained in 2008 due to the $880 million loss reported by the Arab Banking Corporation.

Markaz expects the sector to report a net profit of $506 million in 2009, which remains a poor performance on a historical basis. Markaz says it expects to see further banking growth in 2010 of 59 per cent to $807 million.

The sector's interest income is expected to grow 1 per cent in 2010 to $3.2 billion with interest expense growing at 19 per cent, which would bring the net interest income to $1.1 billion, a 21 per cent decline from 2009.

Provisions for the sector is expected to amount to $550 million for 2009, 58 per cent lower than 2008; however the provisions are now spread across the sector rather than being attributed to one bank. This brings the provision to loans ratio down to 1.72 per cent in 2009 from 3.66 per cent in 2008, which is significantly higher than the historical average of 1.05 per cent. We expect to see further provisioning in 2010 of $618 million, or 1.93 per cent of total loans.