Turnaround year for Gulf banks?

Posted on July 21, 2011


2Q2011 banking results paint a divergent picture. Which nations will recover first?

Gulf banks struggling to overcome the effects of the global credit crisis may be in the middle of a painful turnaround period. As the financial reporting for 2Q2011 speeds up, the results are painting a divergent picture. On the one hand, there is a clear geographical divide. Saudi Arabian lenders, for example, are displaying a much higher level of recovery than, say UAE banks. On the other, the level of exposure to bad debt is creating the other schism – banks with lower levels of provisioning for non-performing loans have displayed more resilience than those saddled with larger burdens of bad loans.

It is little wonder that there are fewer GCC banks in the global top 1,000 rankings for 2011 than there were in the 2010 list compiled by The Banker. The UAE has the largest number of banks – as many as 15 – within the region among the top 1,000, reflecting its status as a regional financial hub. However, seven of the 10 Saudi banks in the survey are in the Top 25 Ranked Banks In the Middle East. Globally, the region now accounts for 3.32% of total Tier 1 capital for the 1,000 banks in this year’s rankings, down from 3.58%.

Most Gulf banks are expected to report a rise in second-quarter profits due to higher income from their retail banking operations and after booking lower provisions. But weaker investment banking fees and the levels of bad debts continue to be a cause for concern, analysts and bankers say. Total credit growth in Saudi Arabia, which saw a 2% rise until the end of March, is also expected to improve in the second quarter of this year but at a slower rate. In the UAE, new retail loan rules issued by the central bank could further stifle domestic credit.

Overall, it looks like the banking sector in the region is slowly but painfully getting its act together again as it recapitalizes and seeks to expand business. It could become a source of investable assets before the year ends. Keeping an eye on this sector could pay off, given how crucial it is to overall economic growth.

More intelligence on the Gulf banking sector: