Banking Special: Steady Progress In The Gulf

GLOBAL ECONOMIC GROWTH

In contrast to other regional economies and the global economy as a whole, growth prospects for the GCC remain sound, helped by the continued high oil price and government spending. Global GDP growth has been revised downwards to 3.3 per cent in 2012 and to 3.6 per cent in 2013 as the knock-on impact of continuing weakness and problems in the Eurozone, as well as weaker growth in China.

The outlook for the global economy has deteriorated as the recovery in advanced economies, including the US, has remained much weaker than expected. As advanced economies account for around one half of global GDP, this has caused a major drag on the world economy. However, the Gulf’s region’s rate of growth will remain around double that of global growth.

Nonetheless, a slowdown in global economic growth would impact the demand for and the price of oil, and in turn pressure would be felt in the GCC, particularly due to very high public spending commitments.

NON-PERFORMING LOANS

Non-performing loans are considered to have peaked in the current cycle in the GCC. For most banks in the UAE, bad loans which emerged from real estate and investment related problems, as well as the well documented issues at sovereign-linked organisations, have been classified and provided for. In other countries, such as Kuwait, the real estate and investment sectors have also stabilised. However, for some banks in 2011, a much higher level of loan delinquencies was seen in the consumer sector with personal credit non-performing loans rising.

The Arab spring has not had any major impact on GCC banks’ non-performing loans. Certain Gulf banks with exposure to countries such as Tunisia, Egypt and Syria have experienced some bad loans but the overall level of exposure is limited. Banks with activities in these countries have diversified portfolios and the proportion of assets located in markets which have been impacted by the Arab spring is small compared to their balance sheets.

Bahrain has been the most affected GCC country by the Arab spring and its financial sector has been directly hit. Although the impact on non-performing loans has not appeared to have had any large affect, Bahrain banks, particularly the offshore institutions, have been impacted through higher funding costs, reduced liquidity and interbank funding.

Socio-political and economic events such as the Arab spring and the ongoing Euro-crisis have impacted market confidence in the GCC region. It has also reduced trade volumes between the GCC and affected countries. This has led to more subdued loan growth and asset expansion.

REGIONAL AND GLOBAL EVENTS

Facing challenges including the need to recapitalise, strengthen liquidity and de-risk, global banks curtailed their lending to the GCC region. In particular for the French and Italian banks, they cut their exposure to the GCC’s project finance sector. Although project finance funding supply has been squeezed,
demand for funding has increased as regional governments have continued with multi-billion dollar projects.

However, projects have not been shelved and new banks, particularly from Asian countries such as China, Japan and Korea, have stepped into the breach and provided finance for Gulf projects.

The corporate debt capital markets have also emerged as a funding option. During the year to August 2012, debt issuance in the MENA region reached a record level of $28 billion. The GCC countries are considering further developing their own domestic debt capital markets and there is also potential for local banks to join forces and offer more syndicated loans.

However, some believe that given the large volume of projects in the pipeline, as well as other investment needs, Gulf banks could face a short-term liquidity squeeze at some point. Market observers believe that the funding will be achieved but the cost may increase. Higher costs are also linked to
the negative impact of the Arab spring where geopolitical risk issues have risen.

Nonetheless, slightly higher funding costs should be mitigated by expanding asset volumes and GCC banks’ net profit will continue to grow, albeit moderately.