(MENAFN - Arab Times) For banks in the Gulf Cooperation Council (GCC) countries, 2011 was a better year than the one before.
Bank profits continued to improve and assets growth was healthy. In the current global context, the region's economic growth is relatively good, with governments at various stages of implementing ambitious capital spending plans to boost economic growth and funding is plentiful.
However, some regional banks continued to deal with the after-effects of the 2008 global financial crisis, particularly on their asset quality.
Asset growth appeared to lose steam in 2011 and profits, while rising rapidly, remain below levels seen before the 2008 slowdown. To be sure, the GCC is not all running at the same pace. At one extreme are Qatar and Saudi Arabia where banking activity has seen a strong improvement. Meanwhile, Dubai and Kuwait are at the other extreme, where profits continued to suffer and lending growth had yet to recover.
Recovery in the sector still underway
The recovery in the GCC banking sector just finished its second year with profits still seeing strong increases. Still, the 16% growth registered is from a low base and average profitability indicators remain relatively low. Return on equity (ROE) averaged 12.2%, just barely higher than its level in 2010 and a far cry from the 19% seen in 2007.
Region divided
However, the aggregate figures for the region hide a more divided environment. Saudi Arabia, Qatar, Abu Dhabi and Oman have all seen a generally more positive picture. Credit growth was healthy and asset quality issues were largely behind them. In these countries, profitability bounced back and lending grew at a double-digit pace.
Not so for Kuwait, Dubai and Bahrain. Bank performance in these markets was less upbeat. While there were some differences among them and certainly individual bank results varied, the markets generally witnessed poorer credit growth and profits continued to be held back by asset quality issues. Dubai and Kuwait in particular were plagued by heavy provisioning levels which ate into nearly half of pre-provision earnings.
High growth markets benefit banking activity
Banks in markets seeing more robust private sector growth and substantial public sector investment saw a more rosy 2011. Banks in Qatar, Abu Dhabi, Saudi Arabia, and Oman saw average growth in profits top 22% and return on equity increasing to an average of 14%.
In these markets, improved profits were achieved on the back of healthy credit growth. Average lending growth reached 12% in 2011. Banks in Abu Dhabi were the only ones not to see double-digit growth in total credit. In contrast, growth in Qatar approached 20%.
This strong growth in credit was in part supported by strong government capital spending. The average annual value of investment projects executed in these four markets during the last three years topped 18% of GDP. Saudi Arabia and Abu Dhabi saw the highest intensity of new projects with annual averages of 22% and 16%, respectively.
Dubai, Kuwait and Bahrain saw a far slower pace of execution of planned capital spending. The value of executed projects accounted for an average of less than 9% of GDP over the last three years, half of the ratio for the other GCC markets.
Strong consumer lending growth also provided a boost to bank profits in 2011. Growth topped 17% during the year, with most markets seeing double digit growth following a far weaker year in 2010. Bahrain, Saudi Arabia and Qatar all saw growth above 20%. Meanwhile, Kuwait and the UAE lagged the rest of the GCC, though in both cases growth remained healthy and recovering.
Assets quality dragged down laggards
Meanwhile, asset growth issues remained in the forefront for banking sectors in Dubai and Kuwait and to a lesser extent Abu Dhabi. In all three markets, provisions to pre-provision income exceeded the GCC average. While Abu Dhabi's ongoing heavy provisioning did not stand in the way of strong overall profitability, this was not the case for Dubai and Kuwait.
In the other markets, namely Qatar, Oman and Saudi Arabia, provisioning was substantially lower (between 10% and 15% of pre-provision income). In Qatar, banks avoided high provision expenses throughout the aftermath of the global financial crisis, thanks largely to the government acquiring most of banks' bad loans in 2009.
For the GCC as a whole, provisioning was highest in 2009 and has since fallen gradually. It stood at 35% then and has fallen to 27% in 2011. The average ratio before the crisis stood at 6.7%, a level that was possible not only because of better asset quality, but also due to healthy revenue growth then.
Capitalization continues to improve
Following the economic slowdown and the appearance of substantial asset quality issues in 2008, banks have sought to boost their capitalization and 2011 saw a continuation of that trend. The average ratio of equity to assets across all GCC countries has been gradually rising over the last few years hitting 14% at the end of 2011. Last year saw average ratios rise in most individual markets. The exception was Oman, which saw its sector wide equity to asset ratio decline to 12%.
Capitalization levels were the highest in Qatar and Saudi Arabia, where average ratios exceeded 15%. Kuwait was the country that has seen the largest improvement in capitalization with the equity to asset ratio rising from 10% to 14% during the last three years. Meanwhile, Bahrain and Oman trailed regionally but with ratios that remain quite healthy just below 12%.
Reliance on foreign funding limited
One of the lessons learned from the financial crisis is that excessive reliance on foreign funding can be detrimental for banks and can have severe consequences for financial stability and the health of domestic banking sectors. Since 2009, foreign bank liabilities at GCC banks have fallen substantially. Whereas these stood at 17% of assets in 2007, the average now stands at 11%.
While some countries have reduced their ratios by more than half since 2007, including Saudi Arabia, UAE and Kuwait, there remain some banking sectors that continue to rely heavily on foreign funding. Bahrain is particularly exposed in this regard, though a large part of the foreign funding there is from regional banks. Qatar remains highly reliant, and has even seen its ratio rise in 2011 above its level before the crisis.
2012 is likely to be another recovery year We expect to see the recovery in bank performance continue in 2012 with the overall trends intact. Project spending will continue to be the key driver for banking activity for all markets.
Consumer lending will also contribute to an improved performance, fueled by salary increases and employment. Meanwhile, asset quality issues will remain a problem for many banks in Kuwait and Dubai though provisioning levels will decline gradually.
