The GCC Banking system has shown to large extent resilience to the financial crisis helped by the liquidity and prudential measures introduced by the monetary authorities which contributed in mitigating the adverse impact of the financial and credit turmoil on the banking system. However, the banking systems had few vulnerabilities that were revealed by the financial turmoil and the adverse impact it had on the economies of the GCC countries. Among those are high exposure to the real estate and construction sectors and stock markets along with increased reliance on external financing and capital inflows especially in the UAE. Banks in the GCC region will continue to make profits despite higher provisioning

KUWAIT CITY, Sept 14: In Saudi Arabia the banking system is adequately capitalized and showed more resilience to the consequences of the financial crisis than its peers in the GCC region driven by the prudent regulations followed by Saudi Arabian Monetary Agency (SAMA) and the well diversified loan portfolio of local banks. The banking loan portfolio is well diversified with respect to the private sector with loans to the commerce sector accounting to around 24 per cent of total loans while manufacturing & processing sector contributes to around 10 per cent of banks’ loan portfolio as of March-10.

However, miscellaneous loans which correspond in large part to personal loans and loans to high net worth individuals and lending to equities constitute around 40 per cent of Saudi banks’ loan portfolios. This high concentration might expose banks to credit risk. In contrary to other GCC countries, loans to the real estate and construction sector contribute to a marginal portion of total banking loans with a percentage contribution of 6.5 per cent. The prudent regulations implemented by SAMA before and during the financial crisis have protected the banking system to a large extent from the repercussions of the financial and credit turmoil and helped Saudi banks to emerge more resilient from the global financial crisis.

In Kuwait, the Banking Sector is expected to continue to face challenges in the medium term. Rising NPLs and large concentration in banks’ loan portfolio- particularly in real estate, stressed non-bank financial institutions and equities- are a major source of credit and financial risk. Nevertheless, the banking sector is well capitalized and highly liquid, which should help the financial system to remain stable. The performance of the Banking sector in the short to medium term will remain pressurized by elevated NPLs, lackluster performance of the Kuwait Stock Exchange and the slow recovery in the property market along with the weakening credit standing and rising customer indebtedness.

Stress tests recently conducted by local banks indicate that the banking system is well capitalized and could reasonably withstand significant shocks. Kuwaiti banks’ loan portfolio is highly exposed to the real estate and construction sectors and troubled investment companies, which constitute as of Jun-10 around 33 per cent and 12 per cent of total loans respectively. This highly exposes Kuwaiti banks to market credit risk arising from the slump in property prices and deterioration in the financial standing and creditworthiness of highly indebted investment companies.

In the UAE, the banking sector’s capitalization remains sound and is sufficient to absorb the debt problems faced by Dubai Government Related Entities (GRE). The financial turmoil has put the banking sector in the UAE on a test as local banks are facing difficulties particularly with the rising retail and corporate impairments, debt restructuring at Dubai GRE, slump in the real estate market along with the funding and liquidity pressures triggered by reduced lending appetite and high loan-to-deposit ratio resulting in stagnation in the sector.

The banking sector in the UAE is highly exposed to the construction sector (13 per cent of total loans) and the highly speculative real estate sector. Personal loans for business purposes constitute around 18 per cent of banks’ loan portfolio; it is believed that a significant portion of those loans is directed to the real estate market. Trade and Manufacturing sectors also contribute to a significant portion of banking loan portfolio with a percentage contribution of 10 per cent and 5 per cent respectively as of April-2010.

Qatar: The banking sector is mostly concentrated in the consumption, real estate & construction and public sectors which together constitute around 71 per cent of Qatari banks’ loan portfolio. The real estate and construction sectors account for around 21 per cent of total loans, while the households and public sectors contribute to around 19 per cent and 31 per cent of loan portfolio, respectively. Loans to the public sector, mainly directed to the development of infrastructure and the LNG industry, are guaranteed by the government and do not include any potential credit risk, while high concentration in the real estate sector might expose the banking system to credit risk given the slowdown in the real estate market and the indebtedness of property developers. The continuous preventive intervention of the Qatari government in the banking sector through injecting capital into banks and the purchase of the equity investment and real estate portfolios of the banks has provided liquidity to banks, restored confidence and signaled the government’s commitment to support the banking system and contain financial risk.

Bahrain: The banking sector in Bahrain was adversely affected by the financial crisis and that was evident in the sharp drop in 2009 profitability with the net profit of commercial banks shedding 35 per cent to $362 million. The main reason behind this decline was the elevation in LLP and impairment of investments which amounted to $330 million and $362 million in 2008 and 2009, respectively. The retail banking portfolio in Bahrain is highly exposed to real estate & construction sector and households which together constitute around 56 per cent of banks’ loan portfolio (around 28 per cent of total loans for each segment as of May-2010). The risk of default on personal lending which are mainly secured by salaries is believed to be minimal and manageable. However, high exposure to the real estate and construction sectors would expose banks to credit risk triggered by the slump in property market and tight credit conditions faced by developers.

Oman: The banking system in Oman has exhibited strong resilience to the global financial crisis helped by the prudential measures introduced by monetary authorities which boosted liquidity with banks and strengthened their capital base. However, profitability declined during 2009 by 16.7 per cent, mainly as a consequence of the increase in Loan Loss Provisions (LLP) booked by banks to face increased risks in the credit portfolio. Omani banks continue to be profitable during 2010 despite a significant increase in provisioning and even in the case of significant increase in credit losses.

As for credit concentration, the banking sector in Oman is highly exposed to the household sector with personal loans constituting around 41 per cent of total loan portfolios as of March-10. This high exposure remains the major source of credit risk for Omani banks. The rest of credit is spread among different economic sectors with the construction sector contributing to around 9.5 per cent of total loans followed with the services and manufacturing sectors representing 8.4 per cent and 7.8 per cent of banks’ loan portfolios, respectively.