According to Standard and Poor’s (S&P), the outlook for lending growth remains healthy for Qatari banks. In parallel, that of Kuwaiti and UAE banks remains limited, while Saudi and Omani banks are showing signs similar to those of Qatar.
S&P believes that profitability for GCC banks will continue to improve again this year
S&P believes that profitability for GCC banks will continue to improve again this year. The main reason is that they will be able to continue to reduce the amount they are setting aside in provisions against loans losses. Despite the turmoil in regional markets since 2008, most GCC banks have been able to protect their net interest margins as they were still capable of pricing their loans at decent levels, according to the rating agency.
S&P added that it began to see signs of stabilization in Gulf banks’ revenue generation in 2010 and 2011 and believes that this will continue in 2012. Indeed, banks within the Gulf have been able to keep their operating costs under control, which has somewhat compensated for the weaker revenue generation during times of crisis.
There was a visible worsening in the operating revenues to average assets of the rated GCC banks from 2007 to 2010 due to declining non interest income on the back of a weaker growth of their balance sheets.
The overall weight of provisions in operating revenues is on a downward path, thus helping GCC banks to improve their profitability
Because most of the GCC banks’ non-performing loans peaked in 2009 and 2010, their credit losses began to fall. Consequently, the overall weight of provisions in operating revenues is also on a downward path, thus helping GCC banks to improve their profitability, as measured by their return on average assets. S&P believes that this trend will continue for most of the GCC banks it rates.
Gulf banks, according to S&P, will likely sustain their gradual recovery from the 2008 crisis till the rest of 2012 and 2013. The agency believes that the trend of declining loan loss provisions will continue for most of the banks in the GCC, resulting in further recovery of reported net profits despite adverse conditions in the eurozone and international banking markets.
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
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, as per S&P. This trend of better asset quality and lower loan loss provision is fueling the improvement in earnings at most Gulf banks, according to the rating agency.
GCC banks’ lending and investment exposures to the eurozone are very limited
The turmoil within the eurozone would not have a significant direct impact on GCC banks as their net funding dependence on European banks, and external funding in general, is largely limited and manageable, as per S&P. Indeed, European banks have traditionally been fund providers in international credit markets and they are now contracting their overseas exposures in an attempt to preserve liquidity and capital in line with increasing regulatory requirements and the challenges in the continent at large. Furthermore, GCC banks’ lending and investment exposures to the eurozone are also very limited. GCC banks’ high levels of capital are seen as a major strength, and provide an important cushion against unforeseen stress on asset quality, as per S&P.
Sources: International Monetary Fund, Bank Audi's Group Research Department