Jul 05 2012
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Gulf banking sector growing, albeit at a reduced intensity
Yet, the growth is seen at a "low pace over the next two years" as the banks in most GCC countries keep their more conservative lending stance, given the uncertainties in the global economy. The system's compound annual growth rate increased by a very fast 22 percent between 2002 and 2008, but fell sharply to 4.4 percent between 2008 and 2011, the report noted.
Apart from Bahrain (BBB/Negative/A-3), other GCC members have remained largely insulated from the spillover effects of the political turmoil in other parts of the Middle East and North Africa. The other five countries that make up the GCC are the United Arab Emirates (UAE, not rated), the Kingdom of Saudi Arabia (AA-/Stable/A-1+), the Sultanate of Oman (A/Stable/A-1), the State of Qatar (AA/Stable/A-1+), and the State of Kuwait (AA/Stable/A-1+).
Saudi banks' lending is expected to be about 10 percent in 2012, on the back of sustained retail activity and a gradual pickup in corporate lending toward the end of the year.
S&P's report noted though that the Saudi banks have limited room for boosting profitability from better margins and are therefore focusing on cross selling and fee related businesses. Brokerage related revenues remain a volatile component of their earnings base. "Saudi banks have made substantial provisioning efforts as a precautionary measure supported by the Saudi Monetary Agency (SAMA), and we expect this trend to continue to a lesser extent in 2012," the report noted.
Standard & Poor's credit analyst Timucin Engin said "we believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the eurozone and international banking markets."
Since the start of the global financial crisis in 2008 and despite slower balance sheet growth, most GCC banks have maintained healthy earnings generation before provisioning. Even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses. This trend of better asset quality and lower loan loss provisions is fueling the improvement in earnings at most Gulf banks.
"We don't expect the eurozone turmoil to have a big direct impact on the GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable, in our view. European banks have traditionally been fund providers in international credit markets and they are now contracting their overseas exposures as they are trying to preserve liquidity and capital in line with increasing regulatory requirements and the challenges in the eurozone."
GCC banks' lending and investment exposures to the eurozone are also very limited and their high levels of capital are also a major strength, and provide an important cushion against unforeseen stress on asset quality, said Standard & Poor's credit analyst Paul-Henri Pruvost.
The outlook for lending growth in Kuwait and the UAE remains limited, but is healthy for Saudi Arabia, Qatar, and Oman. For most GCC banks, funding profiles have improved visibly in the past few years on the back of declining balance sheet growth.
In Kuwait, S&P's said lending growth is mostly tied to government-related projects, and lending to domestic customers was a very low 1.7 percent in 2011. Given the current political stalemate in the country, with the parliament suspended, "we expect delays in the implementation of these projects to continue, resulting in limited credit growth for the country. Specifically, we expect low single-digit credit growth in Kuwait this year."
In Oman, credit growth is forecast to remain strong again this year as the government implements its expansionary fiscal policy. Apart from government spending, "we expect lending growth to remain robust in line with the country's healthy non-oil GDP growth. However, the Omani regulator recently changed regulations on retail lending - including lowering the interest rate ceiling and shortening maximum permitted tenors - which should cause retail lending growth in 2012 to be somewhat lower than 2011, S&P's said. Total credit growth was 17 percent in 2011.
In Qatar, credit growth continues to be significantly above the GCC average, and total domestic credit was 28 percent in 2011 alone. However, a deceleration in 2012 is seen before FIFA World Cup-related projects kick in from 2013.
The UAE banking system, meanwhile, will register low single-digit credit growth in 2012, S&P's forecast.
Since 2008 Abu Dhabi banks have continued to underwrite new loans, although at a moderate pace, whereas Dubai banks have not been growing their lending books. That's because of the stronger asset quality and exposure structure of Abu Dhabi's banks. Credit risk remains high in the UAE, the report said, notably owing to the debt overhang of some Dubai-based government-related entities (GREs), which we believe forces banks to adopt a conservative stance.
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