(MENAFN - Arab Times) The UAE, Saudi Arabia, Qatar, and Kuwait's banking statistics showed that the aggregate loan growth for the GCC banking sector was a tad lower at 14.3% y-o-y in August 2012 vs. 14.8% y-o-y in July 2012. Though lower, loan growth in August 2012 was supported by positive credit growth across GCC states. At the time of writing, Bahrain has yet to release the August 2012 banking statistics.
Loan growth in Qatar continues to be the highest in the GCC region, which saw credit expansion of 32.7% y-o-y in August 2012 (July 2012: 38.0% y-o-y), driven by both the public and private (services and trading) sectors. Qatar's banking sector total loans outstanding stood at QAR478.3bln in August 2012, up from QAR360.6bln a year ago. In Saudi Arabia, credit growth was marginally higher at 15.8% y-o-y in August 2012 from 15.6% y-o-y in July 2012, the second strongest in the GCC region after Qatar, supported by both consumer and corporate loans. Total loans outstanding stood at SAR952.4bln in August 2012, up from SAR822.2bln a year ago.
In Kuwait, loan growth increased by 5.4% y-o-y in August 2012, up from 4.5% y-o-y in July 2012, the strongest in 28 months as operating environment and economic activities gradually improved. Credit facilities extended to residents stood at KWD26.6bln in August 2012, up from KWD25.3bln a year ago. Meanwhile in the UAE, loan growth moderated to 3.2% y-o-y in July 2012 from 3.7% y-o-y in August 2012. Total loans outstanding stood at AED1,090.4mln in August 2012 (August 2012: AED1,056.8mln).
Deposit growth & liquidity
On banking sector deposits, aggregate deposit growth of the GCC banking sector increased to 12.4% y-o-y in August 2012 vs. 8.8% y-o-y in July 2012. Qatar's deposit growth expanded by 22.7% y-o-y in August 2012 from 14.8% y-o-y in July 2012, while Saudi Arabia's deposit growth increased by 10.4% y-o-y during the month (July 2012: 9.6% y-o-y). In Kuwait, deposit growth rose by 12.0% y-o-y in August 2012 vs. 11.5% y-o-y in July 2012. In the UAE, deposit growth was higher at 4.5% y-o-y in August 2012 compared to 0.1% y-o-y in July 2012.
Analysis of aggregate loan and deposit growth showed that liquidity of the banking system was tighter in August 2012 for Qatar (113.7% vs. 105.2% a year ago) due to robust loan growth. The loan-to-deposit (LD) ratio for Saudi Arabia was also higher at 82.5% in August 2012 (August 2011: 78.6%). In contrast, the LD ratios for Kuwait and the UAE was lower at 82.5% and 96.8% respectively in August 2012 compared to 86.1% and 98.0% respectively a year ago. In absolute value, as the rise in total loans exceeded total deposits, excess liquidity of the overall GCC banking sector was slightly lower at USD85.6bln in August 2012 vs. USD87.2bln in July 2012.
GCC Banking Sector Outlook 2012
In general, 2012 offers opportunities for GCC banks to boost their lending given the following reasons:
* Positive economic growth (the International Monetary Fund projects GCC GDP growth of 6.5% in 2012 (2011: 6.0%, 2010: 6.3%), as a result of higher oil prices above USD100 per barrel as well as government stimulus spending which should support the regional banking industry.
* GCC banks are expected to play a significant role in lending to large-scale government infrastructure projects, which will see an increased demand from businesses for bank loans.
* International banks are reducing exposure to emerging markets including the GCC. An estimated 50% of bank lending in the GCC was given out by international banks. International banks' retreat offers local banks a chance to grow their loan books.
* GCC banks are well capitalised and well supported to expand balance sheets moving forward.
For 2012, we project GCC loan growth to be more sustainable at 9.0% to 9.5% (2011: 12.0%), supported by GCC GDP growth projection of 6.5% for the year. The pace of loan growth will remain uneven across GCC states in 2012, with Saudi Arabia and Qatar being the main growth drivers. Banks in these two countries are generally well capitalised and profitable with high capital adequacy ratio and low non-performing loans (NPLs). Loan growth in Bahrain in 1H 2012 will be supported by low base effect in the previous year. Meanwhile, the gradual improvement of the operating environment in Kuwait and the timely implementation of the Kuwait Development Plan are crucial to the recovery of banking system loan growth in 2012.
Recent developments in the GCC banking sector and their impact on the banking sector for the respective countries are as follows:
* In Saudi Arabia, the government has approved the long-awaited mortgage law in July 2012, which is a positive development for the mortgage market in the country. The mortgage market is still underpenetrated in Saudi Arabia, with mortgages accounting for only 5.8% of total loans outstanding. As such, in the short to medium term, we do not expect a major change in the mortgage segment. Banks are likely to adopt a wait-and-see approach especially on how the legal system handles housing-related issues in Saudi Arabia. Furthermore, a major impediment to a fast growing mortgage sector is the shortage of affordable housing in the country.
* In the UAE, while economic prospects have improved tremendously over the past one year, continued deleveraging coupled with stricter lending rules mean subdued and low single-digit credit growth moving forward. In an April 2012 ruling, the central bank has set a cap on aggregate lending to both non-commercial and commercial government entities at 100% of a bank's capital base. Preliminary calculations show that two of the largest banks in the UAE are already above this cap. UAE banks have an extension period of 6 months starting October 2012 to comply with the new exposure limits.
Benchmark interest rates are not expected to increase in the short to medium term. Most GCC currencies are pegged to USD, rendering independent movement in the interest rates rather limited and highly dependent on interest rates in the US, in order to maintain parity. The market does not expect a rate rise in the benchmark Fed Funds Rate, after the US Federal Reserve pledged to keep interest rates between zero and 0.25% until mid-2015. Premised on this, coupled with manageable inflation expectations, benchmark interest rates in GCC countries are expected to remain unchanged and highly accommodative in the next few years. In the past one month, Central Bank of Kuwait has even cut interest rates. Knowing the substantial impact interest rate levels have on banks' net interest margins (NIMs), GCC banks are expected to remain mired with low NIMs in the next few years.
On the flip side, LD ratios in some GCC countries have eased significantly from their peaks in 2008, creating comfortable levels of liquidity for banks to lend moving forward. In GCC states where LD ratios are high, for instance Qatar (at 113.7%), we expect the government to continue to play a major role in ensuring that the banking sector has sufficient liquidity.
NPLs are expected to peak in 2012 for most GCC states, leading to lower NPL formation and lower impairment charges for the general banking sector. Combined with continued cost-cutting measures, these should have a positive impact on GCC banks' profitability moving forward.
Wild cards to the GCC banking sector in 2012
* Sustainability of global economic growth which will in turn impact oil demand, oil prices and eventually GCC governments' fiscal ability to spend on infrastructure projects.
* On-time implementation of government infrastructure projects as any delays could hamper economic growth recovery.
* Exposures to the Eurozone sovereigns and banks are negligible in GCC banks. However, prolonged problems in the Eurozone can have negative impact on confidence in the banking sector and appetite for investment in GCC banks' debt issuance. There has been a significant increase in sukuk and conventional bond issues in 2011, as GCC banks seek medium-term funding to improve funding profiles and refinance maturing debt. This trend is expected to continue in 2012, but it will depend on international investor confidence and conditions in the debt capital markets, in terms of availability and pricing.
* In the medium to longer-term, liquidity requirements may be significant as GCC banks have a substantial maturity mismatch " customer deposits are concentrated and contractually short-term albeit very stable, while banks are financing increasingly longer-term assets. According to Basel III requirements, long-term assets may have to be partially backed by funding of the same tenure. However, this will depend on the stance taken by regional regulators.