Loan loss provisions to drop more

There's a well-worn expression about statistics: the one that doubts the veracity of their meaning. They can, of course, be manipulated, and cited with extreme discretion, even if not disputed in their raw state.

In compiling company results data, for instance, it is very apparent that the basic numbers can be treated in various ways, and of course there is an entire industry devoted to doing just that (and undoing it as well). Reports and accounts can disguise reality, and the analysts work overtime.

In consequence, there can then be narrower, broader and simply different definitions of analytical deduction from different sources.

That being the case, certain sets of data still emerge as carrying special weight. In the business of Gulf banking, the path of loan-loss provisions (LLP) is one such key series.

Recently Boston Consulting Group issued the latest of its annual banking performance studies, monitoring in particular revenue, expenses and profitability across the region. It showed revenues at aggregate GCC level growing at 7 per cent, operating expenses by 10 per cent, and profits by a solid 15 per cent.

The suggestion that banking is on the up was reinforced by loan loss provisions (LLPs) being down by 2 per cent, though very variably by country (see table), and not obscuring the fact that a number of banks previously either not or little affected in 2011 actually had to make more provisions.

Speaking last week with Gulf News, Dr Reinhold Leichtfuss, senior partner and managing director at BCG Middle East, explained the nature of the compilation applied.

"BCG has a model which defines all profit and loss statement items taking into account the differences that may exist between bank types and countries." For example, "we differentiate between core operating income, other operating income and extraordinary income in order to assess the development of the core business itself —as opposed to the income generated from the sale of certain assets."

It helps that "the reporting of the banks has become more detailed over time."

As to whether there is an improving trend in asset quality that may account for declining provisions, Dr Leichtfuss had this to say:

"It is important to note that 2011 was the second year in a row in which LLPs decreased overall in the GCC, even though not across-the-board. On the whole, in 2010 and 2011 they were significantly lower than in 2009."

Questioned on the cause-and-effect relationship of banking performance with the economy, he affirmed the importance of GDP growth and development, but offered a special guidance.

"For many years across many economies we have observed that growth in banking revenues reaches approximately 130 per cent of GDP growth," he explained, subject to caveats.

BCG anticipates that to be the case "in all markets not yet highly penetrated with credits and liabilities (both corporate and retail, e.g. mortgages)," i.e. the Gulf included.

In that sense, banking may outperform. And, with quarterly results upon us now, how about the key series mentioned?

"We expect loan loss provisions to decrease further in the coming two years. They will however remain on a higher level than in the years 2005 to 2007," Leicht-fuss said.

Karti Inamdar, senior analyst at Capital Intelligence, confirms that UAE banks are gradually building their loan-loss reserves.

"The central bank's banking sector indicator showed that specific and general provisions of the banks in the country went up to Dh71.7 billion at end-2011 from Dh56.8 billion at end-2010," she told Gulf News.

"Our peer-group average NPLs to gross loans ratio increased to 8.30 per cent at end-2011 from 7.75 per cent at end-2010 (see chart). So there's a slight deterioration, which could be because of the inclusion of Dubai government-related entity (GRE) exposures (other than Dubai World) which are being restructured and some impairments in other sectors, particularly real estate.

"Interestingly, some banks continued to include Dubai World as an impaired asset (mainly Dubai-based banks) at end-2011, while others have removed this exposure from their impaired list.

"It's the same loan, same restructuring deal, so why the different treatment? That's a bit of a mystery," Inamdar said. Still, backed by central bank regulations, "I think banks are still getting used to the idea of treating GREs like any other borrower," she added.

Her view of the future is not so upbeat. "I expect further increases in NPLs across the banking sector this year. In the meantime, "I doubt if some of the banks will be able to meet the central bank's September 2012 deadline to regularise excesses," she says.

"Given that the GREs and the Abu Dhabi government largely drive econ-omic activity in the country, I am wondering what sort of long-term impact this would have on overall GDP growth." So there are stories within the banking stats, and another of wider economic significance that may follow.