Profitability of Gulf’s corporate banking recovers after slowdown
Profitability of corporate banking business in the Gulf is recovering fast from the global financial turmoil, according to a recent study by the Boston Consulting Group (BCG).
According to the firm’s recently-released Corporate Banking Benchmarking Report, as loan loss provisions (LLPs) in corporate banking peaked in 2009, corporate banking profitability consequently declined to levels below those of 2007. However, provisions began to decrease in 2010 and continued to decrease in the first half of 2011. “This has resulted in a corporate banking profitability increase of over 40 percent from 2009 levels even as revenues have remained flat throughout 2009-2010 and the first half of 2011,” said Markus Massi, Partner and Managing Director and BCG’s regional leader in Wholesale Banking and Capital Markets.
Saudi Arabia has been at the forefront of this upward profit trend with the greatest annual increase in corporate banking profitability — at 45 percent — per year since 2009. The UAE is the only other country which has shown an upward trend in profitability, albeit small. Although loan loss provisions are declining in the Gulf region, ratings agencies have recently warned that these could go up in countries such as Kuwait and the UAE. Rating agency Moody’s has projected a negative outlook for the UAE’s banking system because of the ongoing trends of corporate deleveraging, asset quality challenges and continued provisioning.
“Moody’s negative outlook on the UAE banking system is mainly driven by the legacy asset quality challenges related to the restructuring of some large government-related borrowers,” Moody’s said in a recent report. “The significant increase in the renegotiated private sector loans hides the true extent of the banks’ asset quality problems. While fundamental credit issues in the operating environment remain unresolved, some of these loans may re-emerge as non-performing loans,” said Karim Soueissi, associate director of Fitch. Despite the risk of higher provisioning needs in some markets, corporate banking executives surveyed by BCG were optimistic about the future of GCC corporate banking. Most believe the overall GCC GDP will grow between five and 10 percent in 2012 and 2013, with Qatar and Saudi Arabia leading the way. The UAE, Oman and Kuwait are also expected to grow, though at rates of three to five percent.
Despite the supportive economic environment, analysts said GCC banks could still face risks on the profitability front. “Although overall GDP growth is expected, executives indicated that key risks still loom in the GCC which primarily include regional instability, insufficient government infrastructure spending, and events in world markets [especially the Eurozone crisis],” said Mohammad Turra, Principal in BCG’s Dubai office.