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Heads up for GCC credit growth: IIF

DUBAI - The medium-term outlook for GCC bank lending to the private sector should improve, and both the supply and demand for credit are expected to recover in the backdrop of a gradual economic recovery in the GCC, the Institute of International Finance, or IIF, said.

In its Regional Overview, the IIF said empirical evidence shows that on average, recessions end two quarters before the credit crunch ends and nine quarters before housing prices bottom out; equity prices tend to bottom out just as the associated recession ends.

In the short term, however, private credit growth in all the GCC countries will likely remain subdued as banks remain cautious in light of the recent deterioration in asset quality, Garbis Iradian, deputy director of IIF said.

“In the first three quarters of 2010, the effect of both supply and demand factors on private sector credit continued to be felt. Bank deleveraging continues. However, credit to nonfinancial public enterprises, particularly in Abu Dhabi and Qatar, increased significantly, reflecting some rebalancing of banks’ portfolios towards safer assets,” he said.

According to IIF, in Dubai, supply-side factors, in particular higher costs of funds and the need to deleverage, were the most important factors holding back loan growth, although the contraction of GDP also played a role. The higher cost of funds is likely to have been the result.

Iradian believes that a further strengthening of banks’ balance sheets is a key precondition for a recovery in credit growth. “The sooner banks recognise losses and raise additional capital, the sooner they will be able to rebuild their loan portfolios and, as a result, uncertainty about the health of the financial sector will be reduced.”

Regulatory frameworks and supervision of banks and nonbank financial institutions also need to be strengthened and policymakers should facilitate the restructuring of viable government-entities while ensuring a smooth eaexit of nonviable institutions, he said.

However, overall, GCC banks remain well capitalised and profitable with system wide capital and liquidity cushions that helped them weather the global financial turmoil in 2009, the IIF review said. “This is largely due to solid economic performance in 2003-2008 that helped strengthen balance sheets, stronger regulation and high government participation in banks, ranging between 13 per cent in Kuwait and 52 per cent in the UAE.”

In the GCC, the average capital adequacy ratio was above 15 per cent for every banking system in the region although variations among individual banks are at times significant, the IFF review noted.

Non-performing loans, or NPLs, to total loans have almost doubled from 2008 to 2009 in Kuwait and the UAE and are expected to increase further this year. In the past two years, the ratio of banks’ provisions to potential losses associated with NPLs have declined significantly in Kuwait, Saudi Arabia and the UAE, IIF report said. “Overexposure to real estate and highly leveraged companies has eroded asset quality. In the UAE, the banking system is significantly exposed to the construction and highly speculative real estate sectors.”

issacjohn@khaleejtimes.com