GCC banks on strong recovery path
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 UAE had experienced declines in net income of over one percent each in 2010, 2011 witnessed a net income growth of 16.5 percent in the former and 18 percent in the latter, said Kuwait Financial Centre 'Markaz' in a report.
The report said the GCC countries may witness a moderate growth in loans and deposits in 2012 at 10 percent and 7 percent respectively. GCC banks as a whole registered a growth of 15.8 percent in 2011. Saudi and Bahrain saw considerable declines in provisioning of 39 percent and 16 percent respectively in 2011. "We expect 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 two percent increase in interest income as against a 4 percent decline the previous year. Non-interest income grew by 18 percent in 2011. Net interest income is up just 4 percent year-on-year in 2011 versus 14 percent in 2010; this weakness is predicated by a noticeable lack of turnaround in lending growth. Loans grew in line with expectations at 9.12 percent in 2011 while deposits growth of 7 percent exceeded expectation. At the end of 2011, loans stood at $699 billion while deposits were at $788 billion.
The catalyst for this growth is declining provisions after the spikes witnessed in 2008/2009 as a result of the global financial 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 year on year growth in total revenues of the GCC banking sector in 2011, however, was a commendable 10 percent. 2012 expectations The previous report had estimated provisions to decline to $6.7 billion in 2011. However, the decline in provisions has been less steep closing at $8.6 billion, which marked an annual fall of 2 percent.
Banks continue to be overly cautious in their lending practices, with much financing going towards the government rather than the still-fledgling private sector. GCC loans have amounted to roughly $699 billion in 2011, a 9 percent annual growth. Saudi Arabia's lending has picked up with a growth of 5 percent in 2010 to 11.7 percent in 2011. Kuwait too has registered an increase in loan growth of 6.6 percent in 2011 as against 4.8 percent in 2010. Loan growth in UAE has been muted in 2011 at 1.8 percent dampening overall lending growth in the GCC. Qatar has seen a surge in lending, for a second consecutive year, up 29 percent 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 percent for the GCC to $766 billion. 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. Provisioning came down by 2 percent in 2011 and are expected to reduce further in 2012 as a consequence of abundant provisions built up in 2009 and 2010. In UAE and Kuwait provisions are expected to remain above 1 percent of loans. When the global financial 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 percent from 13 percent at the end of 2008.
Likewise, the Qatari government purchased equity and real estate assets in local banks to the tune of $6 billion. 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.