Regional banking in throes of light and darkness

There's a brighter dimension to report alongside the relative gloom which has afflicted the Middle East and Gulf region's banking picture amid the global crisis.

True, a study released last month by the Boston Consulting Group (BCG) revealed that within the Middle East, loan-loss provisions (LLPs) in the banking sector have been at peak levels this year. While the overall growth rate of banking revenues was still positive in the first half, banking profits fell further below 2005 levels as a result.

Nevertheless, the region's banks have continued to be less affected than international banks are by the international financial crisis.

The study was part of BCG's annual banking and retail banking indices measured by the development of banking revenues (operating income) and profits for leading global banks.

Significant growth

The new BCG index revealed that Middle Eastern banks have increased LLPs very significantly, often exceeding an annual growth rate of 100 per cent over the past four years. Many banks reached a peak in the first half of 2009.

The top 25 banks alone built LLPs of almost $7 billion (Dh25.7 billion) in total. Banks in Kuwait and the UAE had to build the highest share of their revenues as provisions. By now, most banks have realised that more than 1 per cent of their loans are non-performing — others will have to follow soon.

Upon third-quarter results emerging, Gulf News's quarterly Financial Review spoke to Dr Reinhold Leichtfuss, senior partner and managing director, BCG Dubai, and leader of BCG's financial services business in the Middle East, on the key data and impact on the Gulf banking sector.

He disclosed that BCG has carried out some further analysis, comparing the latest figures from some major banks to those from the second quarter. The study shows that around two-thirds of banks have increased LLPs in the third quarter.

Approximately half of the banks in the most recent review experienced decreases in revenues during the third quarter compared to the second quarter. However, others increased their revenues between 2 and 4 per cent.

"We expected the second half of this year to remain similar to the first half, but are optimistic regarding an improvement in 2010. Long-term revenue and profit margins will, however, be under pressure," he predicted.

Commenting on how the high levels of LLPs will impact Middle Eastern banks in the near future, Leichtfuss said: "It is likely that LLPs will remain on a high level during the next few quarters, owing to the impact of the financial crisis on the real economy — both in the corporate and retail segments. Still, when compared to some Western countries such as the UK, where, according to estimates, the banking system may have to reserve some $200 billion of LLPs, the figure of $7 billion still seems low."

As with similar studies in other parts of the world, there is variance among the market participants in BCG's later study: 20 banks still grew in terms of revenues, 17 banks incurred a reduction in profit growth, while eight banks still were able to grow their profitability. Out of the banks with a separate retail and corporate segment, in retail four grew in terms of revenue, while eight incurred revenue losses. In corporate banking, seven banks grew while three shrank.

A segment analysis of banks in the GCC shows that retail banking revenues stagnated in the first half of this year, but retail banking profits fell less strongly than total banking profits. Thus, retail banking has been a stabiliser of revenue and profit development for banks in the Middle East, which was also the case around the globe.

For a longer version of thearticle, please look at the forthcoming issue of the Gulf News Quarterly Financial Review to be published on November 18.