A report prepared by KAMCO Research that reviews the pre and post crisis performance of the 61 banks (commercial & Islamic) that operate in the GCC region. The Report also provides our outlook for the Sector throughout the rest of 2011 as well as the major influencing factors shaping the industry in addition to the assessment of the sector’s financial standing and profitability trends.
— Editor


GCC Banking Sector Overview & Outlook
Albeit the never-ending repercussions of the global financial crisis sparing no financial system across the region along with massive provisioning booked against credit losses and impairments on investments, the Banking sector in the GCC region has upheld its enviable position as the key sector in the region. The Sector has managed to maintain a relatively sound profitability and asset quality levels while repairing balance sheets, securing adequate provisions reserves for potential credit losses, and booking impairments on investments.

Looking ahead, notwithstanding the sector’s policy to maintain a safe level of provisions along with cautious strategy in extending loans to certain sectors, the combined net profit of Banks in the GCC region is expected to grow further at 15 per cent during 2011 to a record high of USD 21 billion, and therefore exceeding the USD 20 billion profits recorded during 2007. Moreover, the sector is seen to head towards a favorable operating environment fueled by governments’ massive expenditures on infrastructure projects and real economic sectors along with a positive economic outlook for the GCC states fueled by robust oil prices that are forecast to remain above USD 100 per barrel.
Credit growth in the GCC region improved during the first half of 2011 on the back of robust economic growth across the region which spurs a pick-up in lending to the private sector. Credit remained tight in UAE and Kuwait, where the property market correction and troubled investment companies, real estate developers, and GRE (in Dubai) are hampering the banking sectors’ recovery in both countries.

The Gulf region’s prominent economic outlook supported by fiscal stimulus plans implemented by most governments along with robust oil prices should eventually prompt greater lending by banks, with credit growth is forecast to pick up by the end of the year. Access to credit became difficult, as banks gradually tightened their credit lines after booking massive provisions when the downturn in the property and equity markets led to a sharp drop in asset prices and rise in credit risk. Exposure to Dubai World and Saad Group and Ahmad Hamad Al Gosaibi, added fuel to the fire and forced banks to follow a more cautious lending policy.
Governments in the GCC region are seeking many ways to encourage resumption in bank lending after a stagnant growth in the last two years. Economic recovery in the region should be associated with increasing the contribution of the private sector in economic activity (Kuwait, Qatar and Saudi Arabia) in addition to the huge infrastructure projects implemented by some countries (Saudi Arabia & Qatar) that will act as the major catalyst for economic development.

We do expect a further improvement in credit growth in the GCC region, especially in Qatar, Saudi Arabia, and Oman in the last quarter of this year and throughout 2012. Credit facilities for the whole banks in the Gulf region are expected to reach by the end of the current year USD 750 billion, representing an annual growth rate of 8 per cent during 2011 fuelled by the robust growth in Saudi Arabia and Qatar which are forecast to add further USD 22 billion and USD 19 billion in 2011, respectively. In Saudi Arabia, credit growth is at two-year highs, but it’s still stagnating in the UAE and Kuwait. Credit growth in the Kingdom accelerated to 8.7 per cent year-on-year in August, the highest since April 2009 and is expected to record 12 per cent during 2011. In Qatar, credit growth remains robust at 18 per cent year-on-year in August and is forecast to continue throughout the coming year; credit facilities extended by Qatari banks grew at 18 per cent in September, year-on-year, and are expected to continue their upward trend to grow at 22 per cent during full year 2011.

However, in the UAE credit growth slowed to 1.5 per cent (y-o-y) in June and in Kuwait it remained sluggish at 1.4 per cent. Credit growth is forecast to remain low in Kuwait at 1 per cent during the year 2011 on the back of challenging business environment for banks, low demand for credit, and delay in implementing the development plan, deleveraging along with volatility in local bourse and correction in property market. In the UAE, the wait for the final completion of Dubai World’s debt restructuring by the end of the year or early 2012 continues to act as an obstacle to any improvement in credit growth, especially in Dubai. A pick-up in credit growth in Dubai is not expected in the last quarter as weak economic activity and the continued pressure on the real estate market along with debt restructuring and high levels of provisions pushed banks to reduce lending to the private sector to improve liquidity. In Abu Dhabi, credit growth is picking up in line with the government’s fiscal stimulus plan.

Profitability of GCC Banks
Despite the retreat in profitability levels from its record high in 2007, deterioration in assets quality for some key players in the sector triggered by the challenging business environment and credit risk, the GCC Banking Sector upholds its high reputation and remains the backbone of the GCC states economies; it is also continued to be seen as one of the prime, prominent and most attractive sectors that would benefit from the fiscal stimulus policies adopted by the GCC governments and the improvement in life conditions of local citizens that is fueling consumption and economic activities.
Despite diminishing financial results of the GCC Banking sector in 2008 and 2009 when combined net profit dropped by 16 per cent and 6 per cent respectively, the Sector enjoyed a solid financial standing, remained profitable and highly liquid and was able to expand its balance sheet supported by governments’ policies which aimed at strengthening the financial position of the sector and boost liquidity in the credit market.

During 2010, the Sector returned back to record positive growth rates in its bottom line figures with combined net profit growing at 13 per cent to record USD 18.3 billion compared to USD 16.1 billion in 2009. The upbeat performance came in spite of the tight credit conditions, downturn in the property market along with the high volatility in equity securities forcing many banks to book further provisions and impairments which stood at nearly USD 9.3 billion in 2010.
Even though, provisions remain above the USD 4 billion level during the First Half of 2011, the combined net profit of GCC banks hiked 20 per cent versus 1H-10 to record USD 11.3 billion. This was mainly fuelled by a healthy growth in operating profits before accounting for loan loss provisions (LLPs) and impairments which grew at 12 per cent to USD 15.4 billion driven by an improving operating environment and growth in the loan portfolios.

Accordingly, and in line with the GCC banks’ performance during 2010 and 1H-11, core profitability ratios saw gradual improvements where Return on Average Assets (RoAA) and Return on Average Equity (RoAE) for the sector improved during the last 12 months period ended June-11 to 1.9 per cent and 13.9 per cent, respectively, yet still below its five year average (2005-2010) of 2.4 per cent and 18 per cent. This drop in profitability ratios is mainly attributed to high credit risk which forced banks to book massive provisions and impairments, thus weighing down heavily on bottom line figures.

GCC Banks’ Operating Profits before LLPs & Impairments
The GCC Banking Sector has managed to record growth in operating profit before LLPs and impairments during 2008 and 2009; this growth was achieved despite the challenging operating environment over the same period along with declining interest rates and weak economic activities. Operating profits before LLPs grew by 8 per cent and 12 per cent during 2008 and 2009 to reach USD 25 billion and USD 27.8 billion, respectively. However, the year 2010 witnessed no growth in operating profits before LLPs, while the First Half of 2011 witnessed a 12 per cent rise versus 1H-2010 on the back of a 7 per cent increase in net interest income, thus reflecting the improvement in operating environment and the increase in lending activity despite the low profit margins resulted from depressed interest rates that are currently hovering around their lowest levels in years.