According to analysts, banking institutions in the Gulf oil producing nations seem to be relaxing the tight restrictions imposed on lending after the worldwide financial crisis in 2008 and in response to loan defaults that spread across the region.
Credit for the domestic market in the GCC, an area that produces almost 17 per cent of global oil supply, has stayed low for the last two years. It is starting to show signs of upward movement as the economy brightens and the bank reserves grow into a stronger buffer.
The increases, seen mostly in oil-producing leader Saudi Arabia, are being witnessed, but the level of growth is lagging behind the acceleration seen in 2007 and 2008. Economists predict that the collection of over 150 banks in the GCC (an alliance that is 29 years old) will start to practice more normal lending as 2010 closes, although they will likely be picky about the borrowers and move forward with individuals and those who carry less risk.
Head of Research at Jawda Investment, Paul Gamble, noted that a slight increase in bank lending has been seen in nations around the region and that the growth rate is on the rise through this year and next.
Gamble said that the banking institutions have tweaked their policies toward lending and are getting comfortable with their exposure again. The banking industry has also seen the effects of the crisis and of their hesitancy to lend and is leaning towards improving that situation as the economy stabilizes.
Gamble also noted that banks in the GCC would reach out to those they consider to be in a lower risk category. He said that leading firms in the area, such as government owned organizations, are reaching single obligor limitations that prevent them from obtaining more credit from the banks. This group of GCC banks control over half of the banking assets in the Arab world.
He said that the banks are looking to target firms that are highly transparent and have loans to locals, with low levels of existing debt, that backed by salaries they receive from employment. The growth that is anticipated will still be under that growth rates seen in the past, before the last half of 2008 hit.
The credit in GCC banking institutions has grown slightly this year, extending the almost 15 month stretch of stagnant lending due to the worldwide crisis and the problems local banks experienced when loans defaulted. The problem is that area banks seem to still be hesitant when extending longer-term loans. This coupled with the lower domestic demand and worldwide uncertainty is disheartening to GCC businesses. Because oil prices have risen recently and refilled the government coffers, lending to the public sector has also slowed.
After freezing almost completely in 2009, the credit total for the GCC is on the rise in 2010. Chief economist of Banque Saudi Fransi (BSF), John Sfakianakis, said that bank lending is expected to rise in the last six months of this year, although the growth rates won’t reach those seen before 2009.
He noted that it is not possible to generalise about what has caused this slower lending in the GCC. Different regions, such as the UAE, saw bank institutions relying too heavily on the real estate sector and taking a major hit when that fell. The UAE needs to re-enter those industries that are experiencing growth and help the private sector to create demand outside of the property industry. These are challenging changes that will require time.
The Moody’s Investment Service recently issued comments that state the GCC banking industry is on the road to recovery after the crisis and the problems of defaulted loans. Banks were encouraged to keep increasing their loan loss provisions, which will help them maintain a strong position and assure the investors.
According to analysts Gulf banking institutions have maintained enough liquidity to start lending again after deposits have increased in the last couple of months.
The 51 banks in the UAE officially recorded almost Dh 30 billion in deposits over the first seven months of this year. This total of approximately Dh 998 billion at the close of July is one of the highest ever reached. Credit, however, has grown at a slower rate, climbing approximately Dh 10 billion to hit Dh 1,025 billion over the same seven-month period.
Saudi Arabia has the next largest Arab banking sector after the UAE and saw deposits fall from Dh 942 billion at the close of 2009 to Dh 917 billion by the end of January in 2010. Those numbers climbed to Dh 942 billion by the close of July 2010, which was almost Dh 17 billion more than the levels reached in July 2009.
On an annual basis, the deposits at banks in Oman rose 11.6 per cent, reaching RO 9.85 billion at the close of July. In Qatar the total deposits rose almost QR 12 billion to hit nearly QR 246 billion by the close of May this year.
Retail banks in Bahrain recorded deposits of approximately BD 10.13 billion at the close of June, a record high up from the BD 9.52 billion recorded at the close of 2009.
In Kuwait the total bank deposits fell from KD 28.1 billion at the close of 2009 to KD 27.9 billion at the close of July.
Those slower lending activities in the GCC had an effect on the performance of the banking industry. As stated on their balance sheets, net earnings fell about 8.5 per cent from the $15.74 billion recorded in 2008 to land at almost $14.39 billion in 2009
Bahrain is the biggest center of offshore banking in the Mideast and recorded the largest decrease at 35.2 per cent. In comparison, the banks in Kuwait had an increase in their net income of approximately 70 per cent.
The UAE banks recorded a combined net profit that fell approximately 19.18 per cent. Oman’s banks showed a fall of 15.2 per cent and the banks in Saudi Arabia recorded a drop of 10.14 per cent. Qatar’s banks recorded only a small decrease of 0.1 per cent.
In the first six months of 2010 the net income of the 12 UAE banking firms included on the bourse list rose by almost 2.2 per cent, hitting Dh 8.2 billion. This was despite the large loss recorded by the Abu Dhabi Commercial Bank, the leading government controlled institution.
A collection of UAE banks recorded lower earnings, but those figures were countered by increased profits at leading banks such as the First Gulf Bank, Union National Bank, the National Bank of Abu Dhabi and Mashreq Bank.
Qatar’s banks recorded a rise in net income of 17 per cent for the first six months of 2010, hitting QR 3.04 billion (Dh 3 billion). The banks in Qatar recorded a drop in the NPL provisions, falling from QR 92 million in the first quarter to land at QR 32 million.
The Oman banks reported a drop in net income of almost 5.9 per cent from almost RO 129 million (Dh 1.23 billion) in the opening six months of 2009, landing at RO 121.3 million (Dh 1.16 billion) for the first six months of 2010.
NCB Capital noted recently that the banking sector in the GCC had displayed significant hardiness throughout the worldwide financial crisis. However, they also reported that the area’s lending was down considerably from the oil boom period of 2004 to 2008. During that time banking credit had almost tripled bolstered by about 29.5 per cent annual growth.
This drop was pushed even lower by a drop in capital inflows from international markets and plummeting earnings from oil exports, the very elements that supported the positive liquidity figures during the boom. The bank loans in the GCC rose only 3.6 per cent during 2009 and the slumping property market forced area banks to make larger provisions for bad loans.Paul Holdsworth, Staff Writer, Gulf Jobs Market News