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Sharp Fall Seen for GCC Banks’ Profitability in 2009

A contraction in deposits and loans, coupled with growing number of defaults on loans, will lead to a deterioration in asset quality, M. R. Raghu, senior Vice President Research, at Markaz said.

“With the balance sheets of most banks set to shrink for the first time, the year ahead will pose a new set of challenges to policy makers and CEOs who are not used to tackling a slump situation over the past one decade of growth,” he told Khaleej Times. “There need to be coordinated actions from all central banks in the region to address the situation,” he said, ahead of releasing a study next week on the impact of deleveraging on GCC banks.

He said UAE banks would be hardest hit, due to their high exposure to real estate and stock markets.

The gloomy forecast by Markaz was in line with the outlook projected by the Manama-based Gulf Finance House (GFH) which expected growth in domestic liquidity to decelerate in 2009 due to the expected slowdown in the growth rate of “petrodollar monetisation,” a key driver of the monetary base, and decelerating growth in credit to the private sector, which influences the magnitude of the money multiplier.

Demand for credit is also expected to fall in 2009 as the corporate sector cuts back on production and expansion plans, according to the GFH report.

“Most GCC banks will witness profit contraction during 2009, as a result of slower growth in business volumes. Lower net interest income will compound the impact of losses on investment portfolios and lower fee income on bottom lines. Some banks will need to recapitalise or merge, and, in the process, cut back on credit expansion to improve capital adequacy metrics,” GFH said.

The GFH report said in order to ensure adequate capitalisation, banks would have to either recapitalise earnings and cutback on dividends, seek private shareholders’ money via rights issues, and/or sell stakes to strategic investors, government or quasi-government bodies.

The report also expects a drift in the banking sector asset mix towards three main secure asset classes, namely deposits with central banks, government-salary backed consumer loans and loans to government/public sector entities.

The report observed a significant fall in bank reserves, which account for the bulk of the monetary base in all banks in the GCC as a result of the sudden capital outflow during the second half of 2008.

“Corporate loans will lose importance as a driver of balance sheet growth in 2009, in line with the economic slowdown,” it noted.

In a separate report, Markaz said average company earnings growth across the GCC was expected to be flat in 2009, with severe stress on banks, real estate companies and investment services.

Countries likely to witness significant negative earnings growth rates are Bahrain, Kuwait and the UAE, with predicted rates of minus 11 percent, minus six percent, and minus five percent, respectively, it said.

“The slowdown in earnings growth across GCC started from the third quarter of 2008, coinciding with declines in commodity prices, freezing in the credit markets and a downturn across stock markets,” Markaz said in a research note.

The sectors which Markaz expects to cushion GCC economies from further damage are telecommunications, utilities and commodities, with projected growth rates of 21 per cent, 10 per cent, and 10 per cent, respectively.

issacjohn@khaleejtimes.com