The profitability of the GCC banks will continue to improve in 2012 on the back of a steady slide in provisions against loan losses, Standard & Poor’s, or S&P, Ratings Services said on Wednesday.
The ratings agency observed that Gulf banks would continue their steady recovery from the 2008 crisis and remain isolated from eurozone turmoil for the rest of 2012 and 2013.
“We believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the eurozone and international banking markets,” said S&P’s credit analyst Timucin Engin.
Despite the turmoil in regional markets since 2008, most GCC banks have been able to protect their net interest margins intact, as they were able to continue to price their loans at decent level, he pointed out at a briefing at the launch of a report titled “Gulf Banks Shrug Off Eurozone Turmoil To Continue Steady Recovery From 2008 Crisis.”
Engin said credit risk would however continue to remain high in the region, particularly the UAE owing to the debt overhang of some government related entities, or GREs, which “forces banks to adopt a conservative stance.”
In the UAE, where more than 25 per cent of lending has gone into the real estate and construction sector, lending activity is expected to grow at 4-5 per cent in 2012, he said.
The recent move by the UAE Central Bank to tighten limits on lending to GRES and local governments will further restrict lending growth, Engin said.
S&P analyst noted that since the start of the global financial crisis in 2008 and despite slower balance sheet growth, most GCC banks have maintained healthy earnings generation before provisioning. “Even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses. This trend of better asset quality and lower loan loss provisions is fuelling the improvement in earnings at most Gulf banks,” he said.
Stuart Anderson, managing director, regional head Middle East of S&P, said the eurozone turmoil would not have a big direct impact on the GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable.
“European banks have traditionally been fund providers in international credit markets and they are now contracting their overseas exposures as they are trying to preserve liquidity and capital in line with increasing regulatory requirements and the challenges in the eurozone,” Anderson said.
“GCC banks’ lending and investment exposures to the eurozone are also very limited and their high levels of capital are also a major strength, and provide an important cushion against unforeseen stress on asset quality,” said Standard & Poor’s credit analyst Paul-Henri Pruvost.
Apart from Bahrain, other GCC members have remained largely insulated from the spillover effects of the political turmoil in other parts of the Middle East and North Africa, S&P said. While the UAE is not rated, Saudi Arabia is AA-/Stable/A-1+, Oman (A/Stable/A-1), Qatar (AA/Stable/A-1+), and Kuwait (AA/Stable/A-1+).
The outlook for lending growth is healthy for Saudi Arabia, Qatar, and Oman. For most GCC banks, funding profiles have improved visibly in the past few years on the back of declining balance sheet growth.
The ratings agency recently observed that GCC banks have capitalisation that generally exceeds their international peers.
The risk-adjusted capital, or RAC, framework, which S&P used to measure banks’ capital adequacy, indicates that the average RAC ratio for GCC banks stood in the 12 per cent-13 per cent range as of end-December 2011— about five percentage points higher than the 7.4 per cent average it had projected for the 100 largest banks we rate in September 2011.
S&P considers that GCC banks’ capital and earnings are “strong.” Not only do GCC banks’ RAC ratios outperform those of our top 100 rated banks, but they also rank highest among other regions, S&P said.