The Middle East’s banking and finance sector recorded strong growth in the first nine months of 2008. However, this changed in the fourth quarter, when the fallout from the global economic turmoil began to hit the banks’ balance sheets.

Earnings growth slowed towards the end of the year, coinciding with declines in commodity prices, the freezing of the credit markets, a downturn in the stock markets and tumbling real estate markets.

The sudden departure of speculators, who had invested heavily in the potential revaluation of GCC currencies against the dollar, in the second half of 2008 delivered a further unexpected blow to banks’ balance sheets.

Falling profits

The impact of the recent economic turmoil is most starkly illustrated by the fortunes of the UAE’s Mashreq Bank, which was 28 on the MEED 100 list in 2008, but fails to make it onto this year’s list. The bank’s profits for the fourth quarter of 2008 were $32.6m, down 78 per cent from the same period in 2007.

Overall, its profits fell by 14 per cent in 2008 to $466m because of declining activity in the fourth quarter and $207.5m worth of provisions for investment losses.

UAE banking giant Emirates NBD - the largest bank in the GCC by asset size - also reported negative growth for 2008, recording a decline in profits of 7 per cent. In 2008 it was 14 on the MEED 100 list; this year it is 32. The bank reported total profits of $1bn for 2008. Net profits fell from $3.8m in the fourth quarter of 2007 to $330,000 in the same period last year.

Other banks hit by the turmoil include Abu Dhabi Commercial Bank, which has fallen from number 43 to 76 in this year’s rankings.

In total, 12 financial companies have dropped out of this year’s MEED 100, in part because of lower valuations for their investment portfolios. One example is Emirates NBD, whose investment portfolio fell in value by AED471m ($128m) in 2008.

The MEED 100 shows that the financial sectors in some Gulf states’ have fared better than others over the past 12 months.

Kuwait’s banking sector is the worst performing, the state’s reputation as a financial hub being dealt a blow in December 2008 when its biggest investment bank, Global Investment House, defaulted on a $200m loan. The bank was ranked 83 in the MEED 100 list in 2008 but has dropped out of the rankings this year, along with Gulf Bank, Burgan Bank, The Investment Dar and Boubyan Bank, all based in Kuwait.

Gulf Bank shares ceased trading on the Kuwait Stock Exchange in October 2008, pending a government investigation, after the bank announced losses of KD200m ($168) from currency derivatives trading.

Dubai’s financial sector is the second worst hit in the region, according to the MEED 100. Together with Mashreq Bank, notable absences from this year’s rankings include Commercial Bank of Dubai and Dubai Investments, following falls in their share values.

By contrast, no Qatari finance houses have fallen out of the rankings. Commercial Bank of Qatar has more or less maintained its position, dropping one place to 42, while Masraf al-Rayan remains at 71. Most of the state’s banks retain their positions from 2008, while Qatar Islamic Bank has climbed to 23 from 52 in 2008, and Qatar National Bank has risen five places to 18.

Saudi listed financial companies are equally strong in this year’s list. Three of the top 10 companies are Saudi banks, and 10 of the 42 financial institutions are from the kingdom.

While regional governments have been injecting liquidity into state banks to ease tight conditions - Abu Dhabi, for example, injected $4.36bn into five local banks through capital notes in early February - there is also the possibility that government intervention will have to continue, but on a larger scale, as demonstrated in Qatar.

Qatar’s sovereign wealth fund, the Qatar Investment Authority, acquired 5 per cent stakes in the share capital of seven state-owned banks in mid-January.

The regional stock markets also remain weighed down by adverse economic developments. All GCC bourses experienced negative growth in January 2009, reflecting ongoing losses that started in September 2008. The Kuwait bourse, for example, lost 300 per cent in the 11 months to November 2008.