Although the Gulf banking sector began to feel the liquidity problems in the global economy in September 2008, it was in 2009 that the full impact of the crisis hit.

MEED’s annual survey of the top 20 banks in the GCC by asset size reveals their combined assets grew by just 4 per cent to $783bn in 2009, from $752.6bn the previous year, marking a significant slowdown from the 15 per cent growth recorded that year and the 30 per cent seen in the boom years of 2003-2007.

UAE banks significantly slowed … their credit expansion in 2009 and adopted a cautious stance [on lending]

Sofia el-Boury, Shuaa Capital

Of the 20 banks to make it into the ranking this year, eight saw their asset size shrink in 2009. Emirates NBD remains the region’s largest lender with assets of $76.7bn, despite contracting 0.23 per cent last year.

Compounded crisis

Saudi Arabia’s National Commercial Bank is still the second largest with assets of $68.7bn, while the UAE’s National Bank of Abu Dhabi has climbed one place, overtaking Samba Financial Group to take third position with assets of $53.6bn.Two banks dropped out of this year’s list: Bahrain’s Gulf International Bank and Kuwait’s Gulf Bank, which stood at positions 17 and 20 respectively in 2009.

Such growth [in 2007 and 2008] was excessive and helped cause the bubbles that formed in the local economies

Giyas Gokkent, National Bank of Abu Dhabi

The combined net profit among the top 20 banks has fallen 3.7 per cent from $13.5bn in 2008 to $13bn in 2009, largely on the back of asset value write-downs and higher provisioning charges.

Total provisions among the banks increased from $6.8bn at the end of 2008 to $12.8bn at the end of March 2010. This was mainly to due to higher non-performing loans (NPLs) which have increased from 2.5 per cent of total loans in 2008 to 4.3 per cent at the end of 2009.

The global liquidity crisis was compounded by the GCC’s home-grown credit crunch fuelled by ‘hot money’. Many banks used capital coming into the region in anticipation of a revaluation of GCC currencies to fund their asset growth by lending it out on a long-term basis.

The top 20 banks in the GCC increased their loan books by $46bn in 2008, bringing their total loans outstanding to $359.3bn, up from $312.8bn a year earlier.      

When the crisis hit, foreign liquidity evaporated from the region and banks were confronted with a sizeable funding gap. Consequently, credit growth came to a standstill, which has led to a sharp slowdown in loan and asset growth, while banks have struggled to compete for deposits.

“UAE banks significantly slowed down their credit expansion in 2009 and adopted a cautious stance on the lending side, as there was a dramatic change of their perception of risk,” says Sofia el-Boury, research analyst at Dubai-based investment bank Shuaa Capital.

“The focus was continuously oriented towards reducing risks and ensuring an optimal asset allocation given the difficult and uncertain climate they were operating in.” 

Credit growth was especially muted in 2009, with many banks preferring to hoard cash at their respective central bank or invest in foreign assets. Commercial bank deposits held with the Saudi Arabian Monetary Agency (Sama), the kingdom’s central bank, jumped 37 per cent last year. This was in spite of many measures implemented to encourage lending, such as interest rate cuts and a reduction of its reverse repo rate – the rate it pays banks to keep their deposits – from 50 basis points to 25.

“It is still a common trend across the GCC that banks are favouring depositing money at the central bank,” says Giyas Gokkent, chief economist of National Bank of Abu Dhabi. “Currently, about 8 per cent of Oman’s banking sector assets are being held in deposits at the central bank. Such ratios are above and beyond the prescribed levels.”

The ensuing mismatch between loans and deposits saw banks’ loan-to-deposit ratios (LDRs) climb to record highs. Emirates NBD’s LDR stood at 129 per cent at the end of 2008, significantly higher than the 100 per cent mandated by the UAE central bank. 

While LDRs across the GCC have eased slightly – Emirates NBD’s currently stands at 111 per cent – most banks continue to exceed prescribed levels.

Loan growth in the GCC

In the nine months to September 2009, total GCC bank deposits grew 2.1 per cent while loans rose just 2 per cent to $622bn amid increased risk aversion given the uncertainty over the credit quality of borrowers.

Loan growth in the UAE banking sector is forecast at 4-7 per cent for 2010 (projected to be around 6-13 per cent in Abu Dhabi and 0-5 per cent in Dubai), compared with the compound annual growth rate (CAGR) of 37 per cent recorded in 2002-2008. 

“The banks are saying that they don’t want to lend because they want to avoid restructuring or rescheduling more debt in the future,” says Saud Masud, analyst at the Dubai office of UBS. “They are scared about taking on more risk.”

But there have been regional variations, with Qatari banks recording increased lending, driven by strong public sector demand. Qatar National Bank, (ranked fifth in the table with assets of $49.2bn) recorded an 8 per cent expansion in its loan book in the first quarter of 2010, compared with the end of last year.

Economists forecast that any lending activity that does take place this year will be directed at priority government-sponsored infrastructure projects.   

“Any increase in lending will go to the government or government-related entities and this is true across the entire GCC,” says Gokkent. “Obviously the banks cannot just pull the handbrake on existing commitments such as mortgages, so there will be some loan growth from that as well, but it’s not a proper reflection of an increased market appetite.”

Non-performing loans

Regional loans to the private sector all but ground to a halt last year, falling from a weighted average of about 30 per cent in 2008, to less than 3 per cent in 2009.

It is unlikely there will be a significant revival in bank lending until provisioning has peaked. While there are some signs that provisioning is tapering off in Saudi Arabia and Qatar, levels are expected to continue to climb the UAE. 

The Washington-headquartered Institute of International Finance forecasts the NPL ratio of UAE banks will rise from the 4.3 per cent recorded at the end of 2009 to about 9 per cent in 2010, although this is partly due to the central bank’s reduction of the loan classification period from 180 days to 90 days. Fears also remain that a percentage of rescheduled loans could become non-performing later on. 

The GCC banking sector has been dealt a major blow by high-profile debt repayment problems at state-owned Dubai World and Saudi Arabia’s Saad Group and AH al-Gosaibi & Brothers. To date, exposure to the two troubled conglomerates is estimated to be in excess of $10bn, including $5bn by Saudi banks and $2.9bn by 13 banks in the UAE. 

Other GCC countries have been less affected, with Kuwaiti banks’ exposure at $1.3bn and Omani banks’ exposure estimated to be about $230m. However, most of this is held by Oman’s largest lender Bank Muscat, which has declared exposure of $171.4m through its Riyadh branch and $44m at its Bahrain unit BMI Bank.

Most significant has been the financial collapse of Bahrain’s Awal Bank and The International Banking Corporation due to their exposure to the conglomerates.

The $23.5bn debt restructuring currently taking place at Dubai World has also hit banks’ balance sheets, with UAE banks having an estimated exposure of $15bn. More recently, the spotlight has been turned on Dubai Holding – another state firm – which is saddled with debt amounting to about $12bn. Its main unit, Dubai Holding Commercial Operations Group, announced it may resort to asset sales after posting a $6.2bn loss for 2009 on the back of Dubai’s property crash.

It is currently seeking to roll over a $555m credit facility that matures in July, while its investment arm, Dubai International Capital, has asked lenders for a three-month extension on $1.25bn debt due this month.

“The problems at Dubai World only emerged at the end of last year, so I expect much of its impact hasn’t been factored in yet,” says Masud.

Slow recovery

Banks remain cautious in the face of asset quality concerns and sustained weakness in various sectors, most notably the real-estate market. Corporate and retail clients are also wary, with many still focused on deleveraging after the excesses of the boom years.

These pressures and funding concerns suggest that recovery of credit growth will be slow.

However, balance sheets will be buoyed, to some degree, by an expected rise in banks’ foreign assets as well as the continued expansion in government expenditure.   

The non-oil sectors of the GCC continued to expand last year as governments’ implemented robust counter-cyclical fiscal policies. 

The consensus among analysts is that GCC banks are expected to post a gradual recovery this year, with increased profits and assets compared with 2009. Kuwait’s NBK predicts asset growth of close to 10 per cent this year. 

“We are not in the heydays of 2007 and 2008 when we had loan and asset growth at 30-40 per cent, but that is to be welcomed,” says Gokkent. “Such growth was excessive and helped cause the bubbles that formed in the local economies.”

Although the worst effects of the global crisis are now believed to have passed, there will further setbacks and challenges ahead.

In this context, the trade-off between liquidity and profitability remains crucially important for banks, with management teams likely to place a greater focus on liquidity.