Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Middle EastSeptember 1 2009

A mixed year for GCC banks

Cash rich: despite the global credit squeeze, the central banks in the GCC are well stocked with capitalThe Gulf Co-operation Council countries - Saudi Arabia, Kuwait, Bahrain, Oman, the United Arab Emirates and Qatar - have suffered as a result of the global economic downturn. Bank profits are down and there have even been some bank failures. But there is also plenty to be upbeat about, with some regions bucking the downward trend. Writer Michael Imeson
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
A mixed year for GCC banks

It has been a year of economic decline and financial market turmoil in the Gulf Co-operation Council (GCC) countries. Reduced demand for oil and gas has suppressed prices and hit the revenues of the region's hydro-carbon producers. The property market in the United Arab Emirates (UAE), where the bubble burst last year, is still in a downward spiral. The UAE announced in May that it would not be joining the GCC single currency, knocking the project, which was due to start in January 2010, off track.

Banks across the GCC have been writing off bad loans and making provisions for further losses, perhaps their most high-profile exposures being to two Saudi Arabian family companies, Algosaibi and Saad Group. And Kuwait's Global Investment House, one of the region's largest investment banks - part-founded and run by Maha Al-Ghunaim, last year ranked by Forbes as the 89th most powerful woman in the world - has been badly affected by the wider economic and financial malaise.

That's the bad news, or at least some of it. But there are many positive facts and information to report. The GCC will not fall into recession this year, but instead register 0.1% real gross domestic product (GDP) growth, according to the chief economist's department at Saudi Arabian bank Samba. That is a miniscule rise compared with 6.7% growth in 2008, but it is not a drop. In 2010, GDP is forecast to grow by 3.8% across the GCC as a whole.

These figures disguise significant country variations. So while Saudi Arabia, the UAE and Kuwait are expected to go into recession (with falls in GDP of 1.8%, 0.5% and 1.5%, respectively, in 2009), Qatar, Oman and Bahrain are forecast to grow (with GDP rises of 10%, 1.2% and 1.5%, respectively), according to Samba.

Qatar is the region's bright spot. Increasing production and export of liquefied natural gas will offset oil production and slower credit growth to sustain real GDP growth at between 8% to 10% a year during 2009-10, according to Samba. The other key factor in the GCC's favour is the huge accumulated surpluses in government budgets which are being used for various fiscal measures to support domestic economic activities.

But these positive developments do not disguise the troubles affecting other GCC countries. In the UAE, for instance, despite robust government support, the economy is expected to contract this year, led by a decline in the oil sector as output drops in line with agreed OPEC cuts. Growth is projected to recover to 3% in 2010.

The misfortunes of the Algosaibi and Saad groups have had wide repercussions across the banking sector in the GCC. As well as being hit by the global economic crisis, the two family conglomerates are locked in a highly public legal dispute over fraud allegations and unpaid bank loans. In the summer, The International Banking Corporation (TIBC), owned by the Algosaibi group, and Awal Bank, owned by the Saad group, both based in Bahrain, got into difficulties and were put into administration by the Central Bank of Bahrain.

Algosaibi and Saad are thought to owe collectively about $24bn to dozens of regional and international banks and are restructuring their debt. Ratings agency Standard & Poor's believes the regional banks can manage their exposures, as they are so widely spread and are unlikely to lose 100% of their loans.

Kuwait

Ratings agency Fitch says Kuwaiti banks are coming under increased stress due to the contracting local economy, reduced oil output and exposure to risky asset classes. "Kuwaiti banks' exposure to risky asset classes is significant, with over half of the banking system loan book exposed to potentially risky sectors of the economy, including investment companies, real estate and construction and lending for the purchase of securities," said Fitch in a July report. "This exposes Kuwaiti banks to significant market-induced credit risk." Nonetheless, most banks are expected to remain profitable in 2009.

Perhaps the biggest exception to the outlook for profits is Global Investment House. It reported a $342m loss for the first half of 2009, adding to the $885m loss it made for the whole of 2008, its first to date. "Our first-half results continued to be impacted by market turbulence and decline," says Ms Al-Ghunaim, Global's chairwoman and managing director, commenting on August's results. She adds: "Reassuringly the pace of decline slowed during the second quarter, which gives us confidence going forwards. "Strengthening fee generating lines of business, namely asset management, investment banking and brokerage, is integral to our future profitability. Although we have not yet concluded the restructuring of our debt obligations, I am convinced that we are up to the challenge and will emerge from this period of market dislocation as a stronger company, able to serve our clients even more effectively and deliver value for our shareholders."

By contrast, National Bank of Kuwait, the country's largest bank and the highest-rated in the Middle East, reported a net profit of $439m during the first half of 2009. Ibrahim Dabdoub, NBK's group chief executive officer, says his bank's performance "remains solid and impressive despite the challenging environment for financial institutions worldwide". Core operating income has been resilient compared with the same period last year, allowing it to expand its core operations, both within and outside Kuwait. "This fundamental strength has earned NBK recognition, being the only Arab bank to be named within the top 50 safest banks in the world," says Mr Dabdoub.

Saudi Arabia

The latest monetary data from the Saudi Arabian Monetary Agency (SAMA) confirms that economic activity in the country is subdued. Lending to the private sector increased by only 4% in the 12 months to June, down from 35% in the previous 12-month period, according to Samba's August Economic Monitor. "SAMA's efforts to encourage bank lending to the private sector had some success in June, though risk sensitivity in the sector remains elevated," says the report.

SAMA's measures over the past year have included slashing commercial bank reserve requirements, trimming yields on treasury bills, and reducing the interest it pays on commercial bank deposits. "Data for June indicates that SAMA's promptings have had some effect," concludes the report. "Commercial bank deposits with the central bank declined by 21% compared to May, while bank credit to the private sector registered its first month-on-month gain since February, increasing by 0.5%."

For more on Saudi Arabia's banks, see the interview with Saudi British Bank.

Bahrain

The running story in Bahrain for the past few weeks has been the decision by the Central Bank of Bahrain to put Awal Bank, owned by the Saad Group, and TIBC, owned by Algosaibi, into administration at the end of July.

Even so, the outlook for Bahraini retail banks such as National Bank of Bahrain and Ahli United Bank remains stable, according to analysts. Fitch says it "expects profitability to decline due to slower loan growth, and asset quality and capital are expected to remain under pressure, but these look set to be maintained at adequate levels".

And following the 'de-risking' of the balance sheets of the two major Bahraini wholesale banks, Arab Banking Corporation (ABC) and Gulf International Bank (GIB), in 2008, they are expected to be modestly profitable in 2009. ABC has ditched its wholesale banking model in favour of a universal banking model with a greater focus on retail banking, and GIB is reviewing its strategy.

"Bahrain, along with the other economies of the GCC, is well placed to benefit from the economic upturn," says Rasheed Al Maraj, governor of the Central Bank of Bahrain. "In Bahrain's case, we are continuing with the economic diversification programme set out in our Vision 2030 document that was published last year.

"The continued growth of the financial sector is an important part of this diversification programme and we also aim for further diversification within the financial sector itself. Among the regulatory measures that we have recently taken to encourage diversification is the introduction of a new licence category for private banking activities. This has been introduced in answer to the demand from many overseas private banks for access to the growing GCC market."

For more on Bahrain's banking sector, see the interview with the chief executive of Bahrain's Ahli United Bank.

cp/60/Pudner, Rick.jpg

Rick Pudner, chief executive of Emirates NBD

United Arab Emirates

High levels of retail lending are the UAE banking sector's main weaknesses. Retail loan balances, which grew rapidly last year and stood at $61bn at the end of the third quarter of 2008, are the highest in the GCC, even though the UAE's population is only 4.5 million. Many borrowers are likely to default as the recession bites.

Emirates NBD, the country's biggest bank, and the largest in the Middle East by assets, reported a net profit for the first half of 2009 of $572m, down 20% on the first half of last year, due to what it described as "prudent credit impairment allowances". Its non-performing loan ratio increased in line with expectations to 1.56%, from 1.19% in the first quarter of 2009.

On the plus side, operating profit before impairment allowances rose 26% to $1.01bn in the first half of 2009 compared with the corresponding period for 2008. Customer loans grew 4% and deposits grew 5%. Capitalisation strengthened significantly, with a capital adequacy ratio of 19% (11.4% at December 31, 2008) and a Tier 1 ratio of 12.1% (9.4% at December 31, 2008). The core cost-to-income ratio improved to 34.6%.

Emirates NBD chief executive officer Rick Pudner says: "We have seen strong revenue growth in this half, driven primarily by the broad-based strength of our businesses, as well as cost efficiencies resulting from ongoing rationalisation and the integration process [as a result of the Emirates International and National Bank of Dubai merger of 2007]."

Mr Pudner adds: "In line with our focus on balance sheet optimisation, we have taken steps to bolster our capital base during the first half of the year and we will continue to build on and maximise the benefits of the merger to achieve sustainable growth in profitability. At the same time we are continuing to evaluate and invest in key growth areas and taking steps to ensure that we emerge strongly from the current economic environment."

Qatar

Qatar's banking sector is the GCC's strongest, supported as it is by continued high levels of economic growth. Even so, weaker operating conditions, including a downturn in real estate and construction, have led to rising loan impairments and investment losses.

The Qatari government has taken a number of steps to support the banking sector. In October 2008, the Qatar Investment Authority announced it would take equity stakes in all the banks, except Qatar National Bank (QNB), in which it already had a 50% stake. In March this year, the government, in co-ordination with the Qatar Central Bank, announced it would buy local investment portfolios of Qatari banks at net book value. And in June the government announced it was willing to purchase up to $4.1bn of the banks' real estate assets.

QNB, the country's biggest bank, announced a $574m profit for the first half of 2009, up 11.3%. Chief executive Ali Shareef Al-Emadi says the strong results demonstrate the bank's "ability to deliver consistent growth across the range of its activities while effectively managing risk".

Highlights of the year so far for QNB include being appointed co-manager for two sovereign bond issues totaling $820m, co-manager for Qatar Telecom's recent $1.5bn bond issues, and joint lead receiving bank for the initial public offering (IPO) of Vodafone Qatar. The newly formed Qatar National Bank Syria completed an IPO in August for 34% of its equity. It is expected to open for business before the end of the year, offering a full range of retail, corporate, investment, treasury and wealth management services.

Oman

Omani regulations limit local banks' retail lending to 40% of their total loan books and, as figures from Fitch show, retail loans in the system are only just under this limit. As a result, Omani banks are more exposed to retail lending than others in the GCC. Although these exposures are relatively granular, they pose significant sector concentration risks. The loans are mainly personal loans backed by salaries, so as the economy contracts and people lose their jobs, banks face rising bad debts.

On the other hand, as Oman does not have a large expatriate population compared with other GCC states, its retail sector should not be as heavily affected by expatriate redundancies which, in the UAE especially, has led to increasing numbers of heavily indebted foreigners leaving the country, and their debts, behind.

The Omani banking system is dominated by Bank Muscat, which at the end of June 2008 held 41% of Omani banking assets, with a correspondingly high share of retail loans. Its net profit for the first half of 2009 was $156m, up 4.5% on the same period last year. However, the profit included $137m of post-tax gain on the sale of its stake in HDFC Bank in India. In the second quarter, BankMuscat made provision for credit losses of $104m, which included provisions on the bank's exposures to the Algosaibi and Saad groups.

The mess these two companies are in will continue to have repercussions for banks' bottom lines for some time to come.

Was this article helpful?

Thank you for your feedback!