Loan provisions curb Gulf bank momentum

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JEDDAH - GCC banks' earnings in the second quarter of 2010 was considerably affected by the continuation of high provisions, said Global Investment House.

"While the top-line barely moved year-on-year, provisions grew by 5 percent year-on-year. Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in first quarter of 2010, leading to a massive 48 percent quarter-on-quarter rise in second quarter of 2010," it said.

It noted UAE stood out from its neighbors in the region given the fact that almost half the provisions taken in second quarter of 2010 came from its banks followed by Saudi Arabia, which contributed 23 percent to the provisions taken.

The aggregate net interest income of GCC banks grew by a meager1 percent year-on-year, showing stagnancy in the top-line, Global said.

The loss of momentum came about as sheer stagnancy in loans haunts the GCC banking sector. Loans growth remained diminished, growing 3.5 percent year on year in 2010 and 0.7 per cent year to date while the aggregate net interest margin of GCC banks tapered-off by 12 basis points over 2009.

Saudi Arabia and Qatar posted a 9 percent year-on-year decline and a 26 percent year-on-year jump, respectively.

Qatar's net interest income rode well due to a 46 percent year-on-year jump in Qatar National Bank's top-line. Kuwait posted a drop Shrinkage in the net interest income while that of UAE exhibited a healthy growth.

Provisions, mostly emanating from loan defaults shifted gears during the quarter under review, after taking a breather in first quarter of 2010, leading to a massive 48 per cent quarter-on-quarter rise in second quarter of 2010.

The UAE stood out from its neighbors in the region given the fact that almost half the provisions taken in second quarter of 2010 came from its banks followed by Saudi Arabia, which contributed 23 percent to the provisions taken.

Gauging a pick up in macro-economic activity across the GCC and certain country specific risks, Global maintains its positive stance on Qatar and is neutral on the banking sectors of the other GCC countries.
Meanwhile, Kuwait recorded a 20 percent of GDP fiscal surplus in 2009, outperforming its peers in the GCC," said Charles Seville,director in Fitch's Sovereign and International Public Finance team. "But it suffered the deepest recession in the GCC as private sector confidence buckled and the financial sector coped with a sharp rise in impaired loans. On the plus side, the medium-term outlook has brightened following parliamentary approval for a long-awaited development plan and structural reforms."

Fitch's estimate of Kuwait's fiscal breakeven oil price (the oil price that would be needed to balance the budget, when investment income is included) is lower than for either Saudi Arabia ('AA-'/Stable) or Abu Dhabi ('AA'/Stable), at $32 billion in FY10.

The breakeven oil price rises to $46 billion for the more expansionary FY11 budget but is still below that of peers. The balance sheet is among the strongest of Fitch-rated sovereigns and this is an overriding support to the ratings.

© The Saudi Gazette 2010