Feb 03 2010

KAMCO: Analysis of GCC Banks' Loan Portfolio & Deposit Base

I. Analysis of the Loan-to-Deposit Ratio of GCC Banks

Fuelled by the economic boom and the rally in oil prices which resulted in the accumulation of huge reserves by the GCC countries, the banking sector had witnessed double digit growth in its loan portfolio and deposit base over the period 2004-2008; loans grew at a 5-year CAGR of 32% to reach USD 609 billion at the end of 2008, while total deposits grew at a slower pace with a 5-year CAGR of 27% to reach USD 725 billion at the end of 2008. However, growth in loan portfolio and deposits lost momentum during the first 9 months of 2009 with a marginal increase for each of 2%. This slowdown in the growth of credit and deposit base was mainly triggered by the adverse impact of the financial turmoil on different economic sectors along with tight credit markets and the extensive losses that have been incurred by the GCC equity markets since the intensification of the financial crisis in September 2008. The loan-to-deposit ratio, set by Central Banks in the GCC region varies among countries and plays a vital role in the Lending policy of commercial and Islamic banks; In Abu Dhabi, the loan-to-deposit ratio as of 30-Sep-09 has exceeded the mandated level set by the Central Bank of UAE which is currently at 100%. Loan-to-deposit ratio for the banking sector in Abu Dhabi continued its upward trend over the last 2 years to reach a maximum of 102% as of September-09 up from 101% and 92% at the end of 2008 and 2007 respectively. This significant increase in the loan-to-deposit ratio has been fuelled by the growth in credit to finance real estate sector and the infrastructure projects along with the low growth rate in deposits over the same period; the surge in loan-to-deposit ratio during 2008 is mainly explained by the 32% increase in credit facilities versus a 26% increase in deposit base with banks. Fuelled by the economic boom in the country, Qatari Banks have also exceeded the limit set by the Central Bank of Qatar, which currently stands at 90%, by around 1100 basis points. On the other hand, Saudi banks enjoy the lowest loan-to-deposit ratio which recorded 73% as of 30 Sep-09 compared to a ceiling of 80% set by the Saudi Arabian Monetary Authority (SAMA). This gives the Banking sector in Saudi Arabia an edge to expand its credit portfolio with a room Dubai and Kuwait both enjoy a room to extend additional credit of USD 10 billion and USD 8 billion without breaching the limit for loan-to-deposit ratio set by the Central Banks in both countries which stand at 100% (for Dubai) and 85% (for Kuwait) respectively.

II. Analysis of the Loan-to-Deposit Ratio of GCC Banks

The GCC Banking Sector continued to post solid growth in its deposit base in line with the Banks' expansion strategies across the region in attracting further customers and augmenting its capital size; consequently, total deposits registered a CAGR of 27% over the period 2004-2008, with the highest yearly growth of 38.6% reported in 2007 to stand at USD 604 billion compared to USD 436 billion and USD 282 billion registered at the end of 2006 and 2005 respectively. The sustainable surge in deposit base was mainly on the back of the economic growth in the region during that period, along with the increased oil prices, availability of liquidity in the market, as well as high yield on deposits offered by banks to increase its deposit base and in turn increase its loan portfolio to boost its interest income. On the other hand, given the market financial conditions mainly in Q4-08, aggregate deposits with the GCC banks grew by 20% y-o-y, to stand at USD 724.7 billion at the end of 2008. Furthermore, the slowdown in the total deposits' growth stepped up during 9M-09, to reach USD 740 billion as at Sept-09, growing by a marginal 2.1% compared to Dec-08. Growth in Total deposits during 2008 was mainly spurred by investors' lack of confidence in the stock market where risk has been elevated due to the high fluctuations in asset prices triggered by the financial and credit turmoil which hit the global financial system, and hence investors preferred low yield bank deposits as an alternative to risky investments in the stock market. However, with the intensification of the crisis and the liquidity shortage that prevailed over the market, total deposits continued to grow yet a drastically lower pace. On a country basis, despite the drop in deposits in the Kingdom of Saudi Arabia's Banks, it still holds the largest deposit base among its GCC peers with a percentage contribution of around 38% of total GCC deposit base or around USD 283 billion as of Sep-09. The banking sector in UAE followed with a percentage contribution of 30% (deposit base of USD 221 billion), while Kuwaiti banking sector maintains its third largest position with a percentage contribution of total deposit base in the GCC region of 17%, equivalent to USD 124 billion as of Sep-09.

III. Loan Portfolio of the GCC Banking Sector

Net Loans and Advances extended by the banking sector in the GCC region posted a solid and healthy growth over the period 2004-2008, growing at a CAGR of 32%, hence indicating the consistent and significant upward trend in the loan portfolio of all the banking sectors in the GCC countries, with no exception, that had been witnessed over the same period. All the countries have witnessed a sustainable growth in their banking sectors' loan portfolio over the period 2004-2008 with the highest growth being noticed in Dubai & Qatar as banks' loan portfolios grew over the same period at a GAGR of 65% and 47% respectively. This significant increase in credit was mainly fuelled by the economic boom that the GCC countries have enjoyed over the last 4 years supported by the rally in oil prices along with ample liquidity in the Credit market and significant appreciation in the price of financial asset and the increasing interest in the property market which pushed prices upward to unprecedented levels. The Banks' aggregate loan portfolio surged 30.4% during 2008 to USD 609 billion as of Dec-08. However, amid the intensification of the global financial meltdown and credit turmoil during Q4-08 and 9M-09, all banks in the GCC region became more reluctant in extending additional credit to their customers, with tight credit policies being adopted triggered by the mounting risk of default by several investment & conglomerate groups and property developers. Such situation has led to a sharp slowdown in the growth of loan portfolio which stood at USD 622 billion as of 30-September-09, growing by a mere 2.1% during 9M-09.

The breakdown of loans among the 6 GCC countries shows that as of 30-Sep-09 the UAE Banking sector has the biggest share with a 34% market share of loans, equivalent to a value of USD 213 billion, while the banking sector in Saudi Arabia follows directly with a percentage contribution to total loans of 33% or around USD 207 billion. The Kuwaiti banking sector is the third largest sector by the size of its loan portfolio with a market share of 16% or around USD 98 billion. Loans extended by banks in Dubai witnessed the highest growth rate over the period 2004-2008 to grow at a 5-year CAGR of 65%; loans surged from USD 14 billion at the end of 2004 to USD 102 billion as of Dec-08. However, no growth had been noticed in the 9M-09 due to the elevated default risk, flight of international capital along with the slump in property prices and the devaluation of financial asset prices and the slump in the stock market. In Qatar, the aggregate loan portfolio of Qatari banks grew at a healthy CAGR of 47% over the same period to reach USD 60 billion as of Dec-08. The economic boom along with the government's huge spending on infrastructure and real estate projects fuelled the demand for credit. Despite the notable slowdown of credit expansion during 9M-09, the government is expected to maintain its capital spending on health, education and transport that will act as a catalyst for the credit growth over the coming few years.

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© Press Release 2010

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