GCC banking sector 2012 — a slow and cautious return

MUSCAT — After two consecutive years of disappointing gures, the GCC banking sector resumed its trajectory of expanding pro ts in 2010/2011, the Kuwait Financial Centre (Markaz) said in a new report on the sector.

Authors M R Raghu and Layla al Ammar note in the report that the catalyst for this growth is declining provisions after the spikes witnessed in 2008/2009 as a result of the global nancial crisis. Additionally, top line growth is expected to resume though not at previous rates due to continued sub-par loans and deposits growth weakness across the region. The YoY growth in total revenues of the GCC banking sector in FY2011, however, was a commendable 10 per cent.

The debt issues which caused a spike in provisioning are by no means history; however, muted private demand and rising NPLs remain sources of concern in 2011 and beyond.

As for lending, GCC banks continue to show muted growth; only Qatar and Oman banks have managed to maintain double digit loans and deposits growth rates. For the rest of the GCC, a “new normal” of mid to high single digit growth is being registered, according to the report.

Provisioning

came

down by 2 per cent in 2011 and are expected to reduce further in 2012 as a consequence of abundant provisions built up in 2009 & 2010. In UAE and Kuwait provisions are expected to remain above 1 per cent of loans.

Overall, following the bottom line growth rates of 9 per cent and 16 per cent in 2010 and 2011 respectively, the authors expect a surge of 21 per cent in 2012.

The GCC banking industry has a long history, stretching back to the 1920’s, when foreign branches operated in the region, speci cally in Saudi Arabia and Kuwait. The rst of these was the Saudi Hollandi Bank, which functioned as a Central Bank in the Kingdom until 1952 when the Saudi Monetary Agency (SAMA) was established. In that same year, National Bank of Kuwait opened, being the rst national bank in the region, although it would take 16 years until the Central Bank of Kuwait was established by which time three banks were operating in the country.

SAMA quickly began regulating the Kingdom’s banking sector, starting with limiting the further expansion of foreign banks in order that domestic banks might ourish. By the 1990’s, the regulatory agency had adopted Basel Accords and was implementing e-banking mechanisms. By 2007, total assets across the GCC banking sector amount- ed to $800bn.

When the global nancial crisis hit in 2008, the effect was felt through the GCC; the Central Bank of Kuwait issued an emergency law guaranteeing all bank deposits in the country to prevent a run on banks. Most governments in the GCC went into “Support Mode” in 2009; the UAE injected capital into banks in order to raise Capital Adequacy Ratios (CARs) to 18 per cent from 13 per cent at the end of 2008. Likewise, the Qatari government purchased equity and real estate assets in local banks to the tune of $6bn.

By 2010, the situation had stabilised somewhat with banks continuing to build up provisions and capital buffers; the UAE Central Bank raised its CAR limit to 12 per cent while most Central Banks in the region continued implementing strict stress tests on their banks to ensure liquidity and stability.

Ownership

The majority of banks in the region are domesticallyowned; and consequently, there are high barriers to entry and restrictions on foreign banks. These barriers also limit the ability for cross-border consolidation. Foreign ownership in banks is severely restricted across the Gulf, from a low of 35 per cent in Oman to 49 per cent in Kuwait and Qatar.

It is notable that the UAE and Bahrain don’t have such restrictions on foreign ownership and consequently, the same can be quite substantial in the two countries, at around 20 per cent of assets for the former and over 50 per cent for the latter. Nevertheless, the majority of ownership sits with government or quasi-government entities, which provides a considerable amount of support to banks.

Regulatory structure

The GCC countries all have highly developed banking regulations, given the long history of central bank activity; most monetary authorities in the GCC were established by the mid-1970’s, with Saudi Arabian Monetary Authority being the oldest, established in 1952.

Central Bank governors in the GCC, like elsewhere, tend to have long tenures, lasting decades; most are politically appointed, and in Kuwait’s case, come from the Royal family. The governor with the longest tenure is currently Hamood Sangour al Zadjali of Oman with an appointment of 22 years; the most recent appointment is Dr Mohammad al Hashel (Kuwait).

Governance

The region’s Central Banks have been active in recent years as they respond to the rami cations of the nancial crisis, which has had farreaching consequences across the GCC.

An over-extension of credit was seen as a high risk during the crisis; most GCC countries maintain a Loans-to-Deposits ratio of 85 per cent-100 per cent, although individual banks will routinely exceed these limits.

The Central Bank of Kuwait recently issued a new directive, effective May 2012, which provides a exible limit on loans-to-deposits. The regulation, aimed at boosting lending, places the limit on loans based the maturity of nancial resources. This replaces the blanket 85 per cent limit previously in place.

Moreover, Capital Adequacy Ratios, which provide banks with a buffer against shocks to the system, have been ramped up across the GCC, from around 8 per cent-10 per cent pre-crisis to a current limit of 12 per cent; although, capital hikes and government support have brought the ratio to around 16 per cent20 per cent across the GCC.

GCC banking in 2011

After three years of muted performance following the global credit crisis and weak economy that followed, 2011 proved to be a relatively good year, with two of the largest markets, Saudi Arabia and UAE posting strong recoveries. While Saudi and the UAE had experienced declines in net income of over 1 per cent each in 2010, 2011 witnessed a net income growth of 16.5 per cent in the former and 18 per cent in the latter.

GCC banks as a whole registered a growth of 15.8 per cent in 2011. Saudi and Bahrain saw considerable declines in provisioning of 39 per cent and 16 per cent respectively in 2011. We expect the UAE, Kuwait and Oman to experience a similar trend in 2012, augmenting the bottom line growth rate of the GCC banking sector in toto.

In 2011, GCC banks recorded 2 per cent increase in interest income as against a 4 per cent decline the previous year. Non-interest income grew by 18 per cent in 2011. Net interest income is up just 4 per cent YoY in 2011 versus 14 per cent in 2010; this weakness is predicated by a noticeable lack of turnaround in lending growth.

Loans/deposits

Loans grew in line with expectations at 9.12 per cent in 2011 while Deposits growth of 7 per cent exceeded expecta- tion. At the end of 2011, loans stood at $699 bn while deposits were at $788 bn. The authors expect moderate growth in loans and deposits in 2012 at 10 per cent and 7 per cent respectively.

2012 expectations

The previous report had estimated provisions to decline to $6.7 bn in 2011. However, the decline in provisions has been less steep closing at $8.6 bn, which marked an annual decrease of 2 per cent. Banks continue to be overly cautious in their lending practices, with much nancing going towards the government rather than the still- edgling private sector.

GCC loans have amounted to roughly $699 bn in 2011, a 9 per cent annual growth. Saudi Arabia’s lending has picked up with a growth of 5 per cent in 2010 to 11.7 per cent in 2011. Kuwait too has registered an increase in loan growth of 6.6 per cent in 2011 as against 4.8 per cent in 2010. Loan growth in the UAE has been muted in 2011 at 1.8 per cent dampening overall lending growth in the GCC. Qatar has seen a surge in lending, for a second consecutive year, up 29 per cent in 2011.

The authors expect lending to stabilise further in 2012; however, the bulk is expected to remain directed to the public sector. Loans growth is forecasted at 10 per cent for the GCC to $766 bn.