Non Performing Loans known as NPLs remained a major concern among the banks across the Gulf region despite signs of stabilisation of the banking sector in 2011 and beyond, according to a Markaz report on the GCC banking sector.
“The debt issues which caused a spike in provisioning are by no means history; however, muted private demand and rising NPLs remain sources of concern in 2011 and beyond,” the report revealed.
“GCC loans amounted to roughly $699 billion in 2011, a 9% annual growth. Saudi Arabia’s lending has picked up with a growth of 5% in 2010 to 11.7% in 2011. Kuwait too has registered an increase in loan growth of 6.6% in 2011 as against 4.8% in 2010. Loan growth in UAE has been muted in 2011 at 1.8% dampening overall lending growth in the GCC. Qatar has seen a surge in lending, for a second consecutive year, up 29% in 2011,” the report, said.
The authors of the report expect lending to stabilize further in 2012; however, the bulk is expected to remain directed to the public sector. Loans growth is forecasted at 10% for the GCC to $766 billion.
Kuwait Financial Center known as Markaz released a full-scale look at the GCC banking sector and the authors MR Raghu and Layla Al-Ammar said that after two consecutive years of disappointing figures, the GCC banking sector resumed its trajectory of expanding profits in 2010/2011.
The catalyst for this growth is declining provisions after the spikes witnessed in 2008/2009 as a result of the global financial crisis. Additionally, top line growth is expected to resume though not at previous rates due to continued sub-par loans and deposits growth weakness across the region. The YoY growth in total revenues of the GCC banking sector in FY2011, however, was a commendable 10%.
As for lending, GCC banks continue to show muted growth; only Qatar and Oman banks have managed to maintain double digit loans and deposits growth rates. For the rest of the GCC, a “new normal” of mid to high single digit growth is being registered.
Provisioning came down by 2% in 2011 and is expected to reduce further in 2012 as a consequence of abundant provisions built up in 2009 and 2010. In UAE and Kuwait provisions are expected to remain above 1% of loans.
Overall, following the bottom-line growth rates of 9% and 16% in 2010 and 2011 respectively, the authors of the report expect a surge of 21% in 2012.
The GCC banking industry has a long history, stretching back to the 1920’s, when foreign branches operated in the region, specifically in Saudi Arabia and Kuwait. The first of these was the Saudi Hollandi Bank, which functioned as a Central Bank in the Kingdom until 1952 when the Saudi Monetary Agency (SAMA) was established. In that same year, National Bank of Kuwait opened, being the first national bank in the region, although it would take 16 years until the Central Bank of Kuwait was established by which time three banks were operating in the country.
SAMA quickly began regulating the Kingdom’s banking sector, starting with limiting the further expansion of foreign banks in order that domestic banks might flourish. By the 1990’s, the regulatory agency had adopted Basel Accords and was implementing e-banking mechanisms.
By 2007, total assets across the GCC banking sector amounted to $800billion.
When the global financial crisis hit in 2008, the effect was felt through the GCC; the Central Bank of Kuwait issued an emergency law guaranteeing all bank deposits in the country to prevent a run on banks. Most governments in the GCC went into “Support Mode” in 2009; the UAE injected capital into banks in order to raise Capital Adequacy Ratios (CARs) to 18% from 13% at the end of 2008. Likewise, the Qatari government purchased equity and real estate assets in local banks to the tune of $6bn.
By 2010, the situation had stabilized somewhat with banks continuing to build up provisions and capital buffers; the UAE Central Bank raised its CAR limit to 12% while most Central Banks in the region continued implementing strict stress tests on their banks to ensure liquidity and stability.
The majority of banks in the region are domestically-owned; and consequently, there are high barriers to entry and restrictions on foreign banks. These barriers also limit the ability for cross-border consolidation. Foreign ownership in banks is severely restricted across the Gulf, from a low of 35% in Oman to 49% in Kuwait and Qatar.
It is notable that the UAE and Bahrain don’t have such restrictions on foreign ownership and consequently, the same can be quite substantial in the two countries, at around 20% of assets for the former and over 50% for the latter. Nevertheless, the majority of ownership sits with government or quasi-government entities, which provides a considerable amount of support to banks.
The GCC countries all have highly developed banking regulations, given the long history of central bank activity; most monetary authorities in the GCC were established by the mid-1970’s, with Saudi Arabian Monetary Authority being the oldest, established in 1952.
Central Bank governors in the GCC, like elsewhere, tend to have long tenures, lasting decades; most are politically appointed, and in Kuwait’s case, come from the Royal family.
The governor with the longest tenure is currently Hamood Sangour Al Zadjali of Oman with an appointment of 22 years; the most recent appointment is Dr. Mohammad Al Hashel (Kuwait).
The region’s Central Banks have been active in recent years as they respond to the ramifications of the financial crisis, which has had far-reaching consequences across the GCC.
An over-extension of credit was seen as a high risk during the crisis; most GCC countries maintain a loans-to-deposits ratio of 85%-100%, although individual banks will routinely exceed these limits.
The Central Bank of Kuwait recently issued a new directive, effective May 2012, which provides a flexible limit on loans-to-deposits. The regulation, aimed at boosting lending, places the limit on loans based the maturity of financial resources. This replaces the blanket 85% limit previously in place.
After three years of muted performance following the global credit crisis and weak economy that followed, 2011 proved to be a relatively good year, with two of the largest markets, Saudi Arabia and UAE posting strong recoveries. While Saudi and UAE had experienced declines in net income of over 1% each in 2010, 2011 witnessed a net income growth of 16.5% in the former and 18% in the latter.
GCC banks as a whole registered a growth of 15.8% in 2011. Saudi and Bahrain saw considerable declines in provisioning of 39% and 16% respectively in 2011. We expect UAE, Kuwait and Oman to experience a similar trend in 2012, augmenting the bottom-line growth rate of the GCC banking sector in toto.
The previous report had estimated provisions to decline to $6.7 billion in 2011. However, the decline in provisions has been less steep closing at $8.6 billion, which marked an annual decrease of 2%. Banks continue to be overly cautious in their lending practices, with much financing going towards the government rather than the still-fledgling private sector.