(MENAFN - Arab Times) The financial turmoil has put most of the markets and firms across the globe under a test of endurance and buoyancy. The unforeseen crisis hit sectors harder than ever expected and thereby resulted in a deterioration of a majority of global economies. The snow ball effect of the bubble revealed the vulnerabilities in the financial sector, requiring countries to undertake exceptional stabilization measures to prevent its financial systems from crashing and minimize the losses brought about by the downturn.
Consequently, similar to all industries in the GCC region, the Banking Sector witnessed a slump in its performance as a consequence of the deterioration in the banks' investment portfolios and real estate exposure along with impairments of investments. Moreover, in order to mitigate the risk of the crisis' effect on loans, banks have booked massive provisions as preemptive measures against the elevation in non-performing loans during Q3-08 and FY-09, which further weighed down on bottom line results.
Soundness of Banks in the GCC Region
Banks Performance & Profitability
Although the GCC Banking sector is seen currently to be far away from the soaring performance that has seen its total profit grow at a 4-year average of 22.2 per cent, the Sector's profitability was hit hard by the financial crisis during Q4-08 and FY-09.
The Sector remained profitable, liquid and sound even though net profit recorded a contraction of 16.5 per cent and 7.9 per cent during FY-08 and FY-09 respectively, which was mainly due to high provisioning and impairment on investments. However, the foremost worries of the banking sectors performance lies in the great stress in property market and the high volatility in equity investments which would force most banks for further provisioning and impairments.
Triggered by the liquidity squeeze along with prevailing tight conditions in the credit market and deterioration of asset prices, aggregate loan portfolio of the GCC Banking Sector experienced a drop in annual growth rate from a record high of 36.6 per cent in 2007 to 30.3 per cent in 2008 and 3.0 per cent in 2009. This decline has been a direct result of banks' implementation of conservative and stricter lending policies to avoid further provisions and impairments.
GCC Banking Sector's asset quality indicators have seen gradual improvement over the period 2004-2007, yet considerably worsened during 2008 and 2009 with the inevitable increase in non-performing loans. Non- performing loans (NPLs) to gross loans improved from 2.27 per cent in 2006 to 1.91 per cent in 2007, well below the 4-year average of 2.67 per cent, yet worsened to 2.27 per cent and 4.04 per cent at the end of 2008 and 2009
Similarly, the Sector has maintained a high coverage ratio of its non-performing credit facilities (Provisions/Non-performing loans) over the same period with an average of around 119 per cent. However, the NPL coverage ratio decreased to 107 per cent in 2008 and further deteriorated to 82 per cent in 2009 compared to 121 per cent in 2007 as banks were forced to book additional provisioning amid the financial turbulence in the credit market.
Loan Loss Provisions & Impairments
The year 2009 was sturdy on the GCC banks seeing provisions and impairments recording USD 10.9 billion, out of which USD 4.12 billion were booked during Q4-09, while USD 6.76 billion during 9M-09.
Provisions booked by Saudi & Emirati Banks contributed to the bulk of the whole provisions booked by banks in the GCC region; both sectors added
USD 7.03 billion, representing around 65 per cent of total provisions booked during FY-2009. Moreover, provisions booked by Kuwaiti Banks amounted for USD 2.6 billion and represented 23.9 per cent of the total provisions during the same year. It is worth to note that the majority of the provisions were concentrated among few banks in the region as indicated in the table below.
Abu Dhabi Commercial Bank and Emirates NBD lead the pack with provisions booked representing 18.5 per cent of total GCC banks provisions, and around 48.5 per cent of total provisions for UAE Banks. KFH has the third highest provisioning in the region, corresponding to around 6.5 per cent of total GCC provisions. The top ten banks, as segregated by the amount of provisions booked, represent nearly 55.9 per cent of aggregate provisions booked for FY-2009.
Up till recently, Banks and Financial Institutions across the region are in Balance Sheet Repair'' mode, with deleveraging, impairments and massive provisioning taking place everywhere. Banks that are going to not only survive but thrive will need to adopt more stringent risk management policies to improve its asset quality indicators and reduce the effect of any potential risk in the future.
Banks Capital Adequacy Ratios
Moreover, Banks in the GCC are subject to legally-mandated requirements by the Central Banks, intended to help them avoid a liquidity crisis and maintain an adequate capital to risk ratio (CAR) to ensure that Banks can absorb a reasonable amount of loss and are complying with their statutory Capital requirements. In this context, GCC Banking sectors' measure of capital to risk weighted assets as indicated by the capital adequacy ratio (CAR) implies that Banks are well capitalized as they have a CAR above the level specified by its respective Central Banks; Saudi banking sector holds the highest ratio relative to the mandated level by SAMA.
Sectors Liquidity Position
Amid the protracted liquidity bubble, the GCC Banking sector showed no immunity but resistance in weathering the financial crisis. Sector's Liquid assets, which comprise cash and cash equivalents, deposits with banks and other financial institutions, public debt instruments amounted to USD 181 billion as of Dec-09 compared to USD 143 billion in 2008, and represented around 18.2 per cent of Banks' total asset base.
GCC Banks' Liquid assets to total deposits ratio indicates that Banks are well handling the liquidity problem as the ratio stepped up to 24.0 per cent as of Dec-09 after declining to 19.8 per cent in 2008 from a high of 26.9 per cent in 2007. The improvement in GCC banks' liquidity measure assures the strong and healthy position that the sector enjoys given the effect of the financial crisis.
The loan-to-deposit ratio, set by Central Banks in the GCC region, varies among countries and plays a vital role in the lending policy of commercial and Islamic banks; In Abu Dhabi, the loan-to-deposit ratio as of Dec-09 has exceeded the mandated level set by the Central Bank of UAE which is currently at 100 per cent. Loan-to-deposit ratio for the banking sector in Abu Dhabi continued its upward trend over the last 2 years to reach a maximum of 101 per cent as of Dec-09 up from 92 per cent at the end of 2007.
This significant increase in the loan-to-deposit ratio has been fuelled by the growth in credit to finance real estate sector and the infrastructure projects along with the low growth rate in deposits over the same period; the surge in loan-to-deposit ratio during the period is mainly explained by the 38 per cent increase in credit facilities versus a 26 per cent increase in deposit base with banks. Fuelled by the economic boom in the country, Qatari Banks have also exceeded the limit set by the Central Bank of Qatar, which currently stands at 90 per cent, by around 760 bps.
On the other hand, Saudi banks enjoy the lowest loan-to-deposit ratio which recorded 72.1 per cent as of 31 Dec-09 compared to a ceiling of 80 per cent set by the Saudi Arabian Monetary Authority (SAMA). This gives the Banking sector in Saudi Arabia an edge to expand its credit portfolio with a room to lend an additional USD 22.4 billion. Moreover, the banking sectors in Dubai and Kuwait both enjoy a room to extend additional credit of USD 9.2 billion and USD 6.3 billion without breaching the limit for loan-to-deposit ratio set by the Central Banks in both countries which stand at 100 per cent (for Dubai) and 85 per cent (for Kuwait) respectively.