Dubai: The banking and financial services industry in the Gulf has weathered the global financial crisis better ‘than their global counterparts and are fast recovering, senior officials from Institute of International Finance (IIF) told Gulf News recently.

"Financial soundness indicators constructed from individual bank balance sheets suggest that GCC banks remain well capitalised and profitable with system wide capital and liquidity cushions that helped them weather the global financial turmoil in 2009," said Dr George Abed, IIF Senior Counsellor and Director of the Middle East-Africa Department.

In a recent outlook on the Gulf economies, IIF said the region's banking sector managed to remain solid throughout the global financial turmoil due to their solid performance in 2003-2008 that helped strengthen balance sheets, stronger regulation and high government participation in banks, ranging between 13 per cent in Kuwait and 52 per cent in the UAE.

"Bank soundness indicators continue to exhibit stability across countries. The average capital adequacy ratio, defined as the ratio of capital to risk-weighted assets, was above 15 for every banking system in the region," said Garbis Iradian, Senior Economist, Africa Middle East Department of IIF.

The average capital adequacy of Gulf banks have been way above the 8 per cent Basel II framework requirement and the local regulatory minimum of 8 per cent in Saudi Arabia; 10 per cent in Oman and Qatar; 12 per cent in Bahrain, Kuwait and the UAE.

Despite the strong fundamentals, the weighted average non-performing loans (NPLs) to total loans in the region have almost doubled, increasing from 2 per cent at end-2008 to 4 per cent at end-2009. While this ratio has remained relatively low by international standards, the ratio of banks' provisions to potential losses associated with NPLs have declined significantly in Kuwait, Saudi Arabia, and the UAE.

"The profitability of the banking sectors have been affected in 2009 by the higher provisioning requirements related to the exposure to some and overall deterioration in corporate loan portfolios, personal loan and credit card portfolios. However, the fundamental strength of the balance sheets indicate the banks do not face any systemic risk," said Dr Abed

Construction sector

The IIF officials said in the UAE the banking system is significantly exposed to the construction sector and real estate sector (25 per cent of total loans), but the timely government support has helped the banks to fortify their balance sheets.

The average capital adequacy ratio for UAE banks stood at 20.3 per cent at end-March 2010, up from 13 per cent at end-2008, and one of the highest for the region, thanks to government capital injections of $16 billion, benefiting several banks.

UAE banks, however, have had to raise loan-loss provisions in 2009 and this trend will continue this year. The combined provisions of banks increased from $6.8 billion at end-2008 to $12.8 billion at end-March 2010. On average, the NPL ratio of banks rose from 2.5 per cent at end-2008 to 4.3 per cent at end-2009, and is expected to rise to about 9 per cent in 2010. This increase is partly due to the central bank's tightening of regulatory standards via a reduction of the loan classification period from 180 days to 90 days.

Strong position

In Saudi Arabia, the balance sheets of the banks are in a relatively strong position as real estate prices remained broadly stable and banks' loans-to-deposits ratios are relatively low at about 80 per cent.

The loan portfolio is diversified with trade being the main sector at 25 per cent of total loans, and real estate at less than 10 per cent.

Kuwait, the banking portfolio is highly exposed to the real estate and construction sectors, which together account for close to 50 per cent of total loans. Kuwaiti banks are also highly exposed to investment companies (12% of total loans), which proliferated in recent years with inadequate controls. The stressed domestic investment companies have put strains on the banking sector during the current crisis.

IFF officials said that the banking system in Oman is concentrated and lacks depth compared to other GCC banking systems. The impact of the global crisis on Oman's banking system has been very limited. Liquidity support provided by the central bank and the government helped banks to weather the challenges without strain on the financial system.

Saudi Arabia - low loan growth

Loan growth in the Saudi banking sector remained low, growing at 1.4 per cent quarter on quarter in the first quarter of 2010 following a 1.1 per cent contraction in 2009. The growth in Saudi lending was led by a strong 7.6 per cent growth in the commerce' segment.

After seeing four consecutive years (2006-2009) of negative-to-flattish consumer loan growth, the Saudi banking sector reported 3.9 per cent quarter on quarter growth during the first quarter of 2010, lower than only Qatar (5 per cent quarter qoq)

"Banks now also seem comfortable with increasing their real estate exposure, with lending to this sector increasing by 7.8 per cent quarter on quarter the first quarter of 2010 in Saudi Arabia. This follows a steep "17.7 per cent decline in 2009," said Mohammad Hawa, banking sector analyst with Credit Susisse.