• Home
• /
• Business

Banks Under Pressure Despite Recovery Signs

Lower business volumes, asset quality deterioration and subsequent provisioning needs and pressure on liquidity appear to be affecting the creditworthiness of GCC banks to differing degrees, according to the report prepared based on a survey of the banks being rated by S&P.

The credit rating agency says that on an average the ratio of non-performing loans (NPLs) to the total loans of the GCC banks reached 5.4 per cent as on September 30, 2009, compared with 2.7 per cent at end of 2008.

“Accounting for most of the increase in NPL were Kuwait- and Dubai-based banks and exposures of some of the Gulf banks we rate to the troubled Al Gosaibi and Saad groups, which defaulted in the second quarter of 2009. Coverage of NPL by loan loss provisions dropped to 86.8 per cent from 151.3 per cent during the same period. However, we expect asset quality indicators to further deteriorate in the next few quarters as the economic slowdown continues to take its toll on the corporate and retail sectors,’’ the report said.

According to S&P banks had not fully taken into account exposures related to the Al Gosaibi and Saad defaults even by September 30, 2009. “By our reckoning, the Al Gosaibi and Saad defaults will boost the ratio of NPLs to total loans for the GCC banks,” the report said.

Saudi and Qatari banks are displaying strong resilience to the deterioration of their operating environment, 
says the report.

But the restructuring of Dubai World announced by the government of Dubai and the subsequent request for standstill on all loans to DW and to its real estate subsidiary Nakheel exacerbated the problems of Dubai-based banks, the report said.

“Because of their large exposures to Dubai-based government related entities and our reduced expectations for government support to the these entities,” S&P downgraded Dubai-based banks by several notches and put them on credit watch with negative implications, the report recalled.

Tight bank liquidity remains an issue for certain GCC countries. “However, various support packages that their governments have put into place and banks’ own reductions of their risk appetites in our view have limited the deterioration.”

Most Gulf banks have put brakes on loan growth. “Overall, growth of total customer loans for the Gulf banks that we rate was flat for the first nine months of 2009, compared with 28.6 per cent in 2008,” says the report.

Return on assets (ROA) for the commercial banks in the Gulf declined to 1.4 per cent in the first nine months of 2009 from the average level of two per cent achieved in 2008, says the report adding that the trend of decline in financial performance is likely to continue over the next few quarters.

According to the rating agency, there will be continuing pressure on the corporate sector, mainly in the real estate and trading sectors, commodities trading, and car dealers.

Retail lending is likely to slow as a result of the slowdown, particularly because of expatriate layoffs in the real estate and financial services industries. This will also lead to emergence of some new retail NPLs in the next quarters, the report said.

The report notes that the GCC countries are showing strong willingness to provide extraordinary support to their banking sectors, although their respective capacities to do so differ significantly. These interventionist measures have significantly eased pressure on the banking system of the GCC countries in general.

Standard & Poor’s has taken 31 negative rating actions on Gulf banks Since June 1, 2009 . This compares with 31 negative rating actions between September 2008 and the end of the first quarter of 2009. These rating actions largely reflect the consequences of the unfavorable economic conditions on Gulf banks’ profitability and asset quality, as well as the bank-specific factors, the report said.

ramavarman@khaleejtimes.com