Challenges continue for GCC banks

22 June 2010

With a sector-wide drop in profits during 2009, the region’s banks have shifted their focus to preserving core operations and improving risk management

GCC in numbers

$5.3bn: The amount Qatar Investment Authority invested in seven local banks

165 per cent: Annualised growth of NPLs in the UAE for 2009 over 2008

$18.6bn: Oman’s budgeted expenditure for 2010

Source: MEED

Asset growth at the GCC’s 61 banks slowed dramatically in 2009, rising just 4.2 per cent in the 12 month period to August 2009 to stand at $1.1 trillion – a significant decline from the annual average growth of 30 per cent during 2003-2008.

Had it not been for state intervention … there could have been systemic failure

John Sfakianakis, Banque Saudi Fransi

But while the impact of the crisis differs from one finance house and country to another, there has been a unified response by the region’s banks, namely a greater dependence on government deposits, a more conservative lending approach and higher provisioning against non-performing loans (NPLs). Collective provisions stood at $9.4bn last year, a 40 per cent jump from 2008 and a fivefold increase from $1.8bn in 2007.

Declining profitability

In 2009, the UAE had the highest increase in NPLs with annualised growth of 165 per cent, followed by Saudi Arabia with 118 per cent and Kuwait with 84 per cent. Oman had NPL growth of 56 per cent, while Qatar’s rise of just 33 per cent made it the best performer. This led to sharp falls in profitability. Average profits across the sector fell 16.3 per cent during the first nine months of 2009 compared with the same period in 2008. The declines range between 5.5 per cent for Qatari banks to 66 per cent for Kuwaiti banks.

“2009 was extremely tough for Gulf banks,” says John Sfakianakis, chief economist at Riyadh-headquartered Banque Saudi Fransi. “Had it not been for state intervention, I think there could have been systemic failure, certainly in the case of the UAE.”

In September 2008, the UAE’s central bank unveiled a $13.6bn support package for the banking sector. In February the next year, the Abu Dhabi government injected an additional $4.36bn into five of its banks, while Dubai’s government issued a $20bn bond the same month.

Doha has arguably been the most interventionist government in the region, which, combined with the domestic economy’s robust performance, explains why Qatari banks enjoyed the highest asset growth in 2009. In February 2009, the Qatar Investment Authority, the country’s sovereign wealth fund, injected $5.3bn into the banking sector by acquiring 5 per cent stakes in seven local banks. The following month, the central bank bought local banks’ investment portfolios for $1.79bn, and at the end of May, it unveiled a further $4.1bn package for buying real estate investments.    

The Saudi banking sector has the most comfortable liquidity profile in the GCC today. But it also suffered amid the financial crisis. Total provisions in the kingdom rose from $600m in 2007 to $2.85bn in 2009 after its NPLs doubled to 2.8 per cent last year, while net profit dropped from $8bn in 2007 to $6.5bn at the end of 2009. 

“Saudi banks entered 2009 well-capitalised and highly liquid so there was never a threat to the solvency of any bank. The main challenge was to bolster existing portfolios in a deteriorating business environment,” says Keith Savard, chief economist at the local Samba Financial Group. “Some banks chose to expand their portfolios, while others adopted a more defensive strategy, particularly after the revelation of debt defaults among two of the largest family conglomerates [Saad Group and AH al-Gosaibi & Brothers].”

Consequently, asset growth among Saudi Arabia’s top 20 banks was mixed, with National Commercial Bank and Riyad Bank recording double-digit growth, while Sabb, Banque Saudi Fransi and Arab National Bank recorded declines.

Debt crisis

Bahrain’s banking sector was also hit by the defaults at the two Saudi conglomerates – its most high-profile casualties being Awal Bank and The International Banking Corporation (TIBC), subsidiaries of Al-Gosaibi and Saad, respectively. TIBC defaulted on loans amounting to an estimated $2.2bn in May last year. The following month, Awal Bank announced large-scale restructuring. In July 2009, the Bahrain Central Bank took control of both banks and appointed law firms to act as administrators.

Bahrain’s banks were also hit by exposure to Dubai’s debt crisis and the correction in the real estate market. Banking sector assets decreased by 12.1 per cent from $252.4bn at the end of 2008 to $221.8bn at the end of 2009.

In particular, Gulf Finance House, one of Bahrain’s biggest Islamic banks, suffered a major default in 2009 and posted a loss of $728m for the year, after its revenues from financing real estate projects fell close to zero and it cleared its books of bad debts.    

But it was Kuwait’s banking sector that was worst affected in the GCC due to the deterioration of real estate, construction and retail portfolios, and a high exposure to investment firms.

“Banks that went into the crisis with a larger reliance on non-interest income, particularly those with large investment books or direct exposure to real estate, took heavier hits from declining asset prices,” says Randa Azar, chief economist at National Bank of Kuwait. “Expectations for Kuwaiti banks hinge largely on progress in implementing the government’s five-year development plan and in deploying public funds for related projects.”

Shifting focus

Meanwhile, the impact of the downturn on Oman’s banking system was limited, with liquidity support provided by the central bank helping banks to weather the challenges. The major contributor to increased NPLs and provisioning was also exposure of Omani Banks to the Saad and Al-Gosaibi conglomerates. Bank Muscat, the country’s largest lender, had exposure to both totalling $171.4m through its Riyadh branch, while its Bahrain unit BMI Bank also had exposure of about $44m. Oman’s NPL ratio to total loans grew to a record level of 2.9 per cent in June 2009. Banks took full provisioning against the Saudi exposure at the end of 2009, resulting in a 15.2 per cent drop in annual net profits to $514m.

Last year witnessed the emergence of a new business environment in the GCC, with banks shifting their focus from maximising profits to risk management and preserving core operations. Today they are well capitalised, with the banking system in each GCC country holding an average capital adequacy ratio in excess of 15 per cent. The ratio in the UAE stood at 20.3 per cent in March 2010, up from 13 per cent at the end of 2008.

The main driver of growth this year will be the continued expansion in state expenditure, offsetting weak private-sector demand. Oman has allocated spending of $18.6bn for 2010, up from $16.7bn the year before. Saudi Arabia’s $144bn budget for 2010 is the largest in the kingdom’s history, representing a 14 per cent increase over 2009. In particular, banks in Qatar and Saudi Arabia are expected to lead the sector’s recovery, due largely to high government capital expenditure and robust fundamentals.

UAE-based banks are expected to face continued challenges from rising NPLs, exposure to Dubai World (estimated at about $15bn) and the depressed property market. The UAE banking system’s exposure to the construction and real-estate sectors account for 25 per cent of all loans.

The performance of the GCC banking sector was overshadowed in 2009 by high provisioning levels that are expected to peak in the months ahead. But the consensus among analysts is that 2010 will be another challenging year. The risks facing most regional banks are ebbing, but there are many hurdles ahead that will ensure the recovery is gradual.

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