Gulf banks poised for steady recovery

Dubai: The Gulf banking sector, which suffered huge losses on account of bad loans and investment losses during the last two years following the global financial crisis, is poised for a steady recovery starting next year, said rating agencies and analysts.

"We believe the asset quality of Gulf banks should improve from 2011 and that their good margins and efficiency will provide a solid foundation for their return to high profitability," said Standard & Poor's credit analyst Mohammad Damak.

Government backing

Standard & Poor's Ratings Services believes that the Gulf banks it rates appear to be showing signs of improvement, after spending more than $20 billion (Dh73 billion) on loan loss provisions and investment impairments since 2008.

Up until 2008, GCC banking systems witnessed rapid asset and credit growth. By the end of 2008, $1 trillion was held on the GCC consolidated balance sheet. Following this surge in growth, economic woes forced these banks to face the new realities of liquidity droughts, asset price declines and lower profitability.

"With negative price and volume effects compressing operating income, together with higher provisioning needs, current bank profitability in the GCC is very much below the levels recorded a couple of years ago. However, capital ratios, at one time under pressure, are now seeing some relief as growth in risk-weighted assets is slowing down," said Anouar Hassoune Vice-President, senior credit officer, Moody's, in a recent report.

Analysts say the regional banks have been coping well with the crisis through government backing and prudent provisioning. Although the rising provisioning has made banks risk averse, banks across the region are expected to return to growth next year.

"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 better in 2009," said George Abed, IIF Senior Counsellor and Director of the Middle East-Africa Department.

Confidence

Rating agencies and banking analysts say Gulf banks are slowly rebuilding their liquidity to face upcoming maturities and have revised downward their growth strategies while government support remains a source of confidence.

"We classify the six GCC countries as ‘interventionist' toward their banking systems, meaning that we believe that these countries are highly likely to provide extraordinary support to their systemically important banks," said S&P's Damak.

Shuaa Capital which conducted a stress test on eight leading UAE banks recently said despite the rise in non performing loans (NPLs) of some of the banks, they are capable of absorbing these NPLs and portfolio impairments, thanks largely to the authorities' efforts to strengthen banks' balance sheets.

"The non-performing loan [NPL] ratio is expected to rise from 3.3 per cent to 8.4 per cent, while total capital adequacy ratio [CAR] remains healthy at 14.9 per cent and Tier 1 capital remains above regulatory requirements at 9.8," said Sofia Al Boury, banking sector analyst of Shuaa Capital.