Provisions likely to decline from next year

Dubai: Despite the continuing surge in the non-performing assets and investment write downs, the banking sector of the six Gulf countries are set for a gradual recovery, according investment banks, rating agencies and banking sector analysts.

"Despite the economic slowdown and suspicions shadowing the equity markets, tumbling property prices and tight credit market conditions as a consequence of the global financial meltdown, GCC banks are gradually expected to recover from the impact of the crisis on the back of stimulus plans initiated by the authorities and the central banks' prudent monetary policies, whilst posting lower results compared to previous years," said a research report from Kuwait-based investment bank KAMCO.

Collective provisions

KAMCO analysts estimate the collective provisions and non-performing assets of Gulf banks — which were $10.9 billion (Dh40.1 billion) and $26.38 billion in 2009 respectively — , to surge to $8.71 billion and $28.52 billion for 2010.

The coming years' estimates are expected to see lower net provisioning as banks may start to recover part of the total provisions booked during the last two years.

The percentage of the region's non-performing loans to total loans, which stood at 4.04 per cent in 2009, is forecast to average around 4.5 per cent in 2010-2011 while the loans loss provisions (LLP) coverage ratio is expected jump from 82 per cent in 2009 to 89.9 per cent and 101.4 per cent in 2010 and 2011 respectively.

Recent banking sector outlook reports from leading rating agencies also indicate that the region's banking sector is poised for improvement in asset quality and profitability.
 
"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.

Up until 2008, GCC banks systems witnessed rapid asset and credit growth. By the end of 2008, $1 trillion was held on the GCC consolidated balance sheet. The impact of global financial crisis saw a steep climb in non-performing assets resulting in lower profitability for banks across the region.

The aggregate profits of the GCC banking sector posted a decline of 5 per cent year on year and 10 per cent quarter on quarter in the second quarter of 2010, Kuwait-based Global Investment House said in a recent report.

Poor bottom-line performance continues to worry UAE banks that reported a 30 per cent decline year on year in the second quarter with Saudi bank profits sliding 7 per cent in the same period.

However, the banking sector across the other Gulf countries reported positive growth in profitability with banks in Oman and Kuwait reporting 40 per cent and 34 per cent growth in profits during the second quarter.

Meagre growth

The aggregate net interest income of GCC banks grew by 1 per cent in the second quarter of this year. The megre growth was a reflection of stagnancy in loans that haunts the GCC banking sector. Overall loan growth remained diminished at 3.5 per cent year on year in the last quarter on a year on year basis and 0.7 per cent year to date.

Similarly, the aggregate interest earning assets grew 3.4 per cent year on year and 0.6 per cent year to date. Total earnings growth of the GCC banking sector came under considerable pressure owing to continuation of high provisions, provisioning grew by 5 per cent year on year and a massive a massive 48 per cent quarter on quarter.

For the next two years, analysts expect the banking sector profitability to remain under pressure due to high provisions. KAMCO estimates GCC banks to report a total profit before provisions and impairments of $26.1 billion and $26.3 billion in 2010 and 2011 respectively. Going forward the provisions are expected to decline.