Banks in the Gulf Cooperation Council countries, excluding Bahrain, had "substantial deposit inflows" from outside the region this year amid political unrest, Standard Chartered Plc said. The United Arab Emirates and Saudi Arabia, the GCC's largest economy, had the biggest gains, analysts led by Victor Lohle said Friday. Sultan Bin Nasser Al Suwaidi, UAE Central Bank Governor, said earlier that he expected the UAE economy to grow by up to 4 percent this year, driven by the tourism and trading sectors, from last year's estimated 2.2 percent, in spite of political turmoil in the Middle East and North Africa. "This year we're talking about a growth rate of 3.5 to 4 percent. Where is growth coming from? It's coming from the tourism sector, and trading sector and manufacturing," he said. "We have normal (capital) flows in and out, therefore we haven't seen any effect in this direction from (uncertain) regional conditions," he said. Fitch expects Saudi banks to remain highly profitable in 2011. The average non-performing loans ratio for Fitch said Saudi banks improved to around 2.9 percent at end-2010 from 3.4 percent at the end of 2009. Saudi banks have ample liquidity given limited lending opportunities and as a result loans/deposits ratios are comfortable. The average loans/deposits ratio slightly improved to 76 percent at the end of 2010, and no bank had a ratio of above 90 percent, which is among the best in the region. "Bank deposits represent the second-largest form of non-equity funding in 2010, but no bank is dependent on interbank funding," Fitch said in a recent update. Saudi bank credit to the private sector, excluding investments in securities, expanded 6.4 percent in April. Standard Chartered further said in the report that "the recent inflows are sustainable, in our view, unlike the speculative inflows in 2007 that were betting on a break in the peg between the US dollar and the UAE dirham," the report said. – SG/agencies"This time around we think the funds are 'stickier' because they are searching for a safe haven and are not speculative in nature." If conditions remain volatile in the Middle East, it's unlikely that the funds will return home imminently, the report said. The regional unrest is prompting wealthy people from the most troubled countries in the Middle East to turn to more stable markets such as the United Arab Emirates. Deposits held by UAE banks increased seven per cent to AED1,123.5 billion ($306 billion) during the first five months of the year, surpassing the increase for the whole of the previous year, according to data from the UAE's central bank. Banks are investing most of the funds in regional bonds with short maturities and spreads have widened, particularly in Abu Dhabi and Qatar, the report said. Companies and governments in the GCC have sold $9.5 billion of bonds this year, compared with $7.6 billion a year ago, according to data compiled by Bloomberg. Borrowers from Abu Dhabi have been the most active, raising $6.2 billion through seven issues. However, Business Monitor International has said that the UAE's banking sector is set to underperform its regional peers over the next 18 months as concerns about a weak real estate market and Dubai's debt overhang will continue to weigh. The sector will remain on its slow road to recovery heading into 2012 but concerns will constrain a more pronounced improvement in banks' balance sheets, the report said. "Until a clearer picture surrounding the extent of domestic banks' exposure to ongoing debt restructurings by major government related entities (GREs) emerges, it will be difficult to alter our fundamental outlook on the sector," BMI said. "Given the risk of further high-profile debt restructurings coming to the surface over the coming 18 months, we maintain our view that the UAE's banking sector will underperform its regional peers in Saudi Arabia and Qatar in 2012," BMI added. They also noted that lending activity levels in the UAE were also well behind that in Saudi Arabia and Qatar. And they said the fact that provisioning for non-performing loans hit a record high of AED47.1 billion in May "should provide some concern". - SG/agenciesBMI said that according to recently released data from the central bank in addition to Q1 financial statements from some of the country's largest lenders, "it is apparent that the United Arab Emirates' banking sector continues to trudge along on its slow road to recovery". It added that the most noticeable development in the industry over the past three months has been the marked improvement in underlying liquidity conditions. BMI said this had been driven in large measure by a fundamental reappraisal of risk sentiment that has solidified the economy's reputation as a "safe haven" in a volatile region. It added that unrest in Bahrain had undermined its reputation as a stable banking hub in the Middle East, leading to a "pronounced shift in deposits into the UAE's banking sector". Through April the total stock of deposits in the industry increased by 16.4 percent year-on-year, marking the fastest rate of expansion since September 2009, and a noticeable improvement upon the 6.8 percent rate of growth posted in December last year. "Regardless of this slightly more sanguine outlook on the domestic operating environment however, banks remain relatively risk averse in our opinion, and have hitherto failed to begin ramping up lending," BMI's report said. In the first four months of the year, the total stock of loans in the economy increased by only 3.2 percent year-on-year, analysts said, well below rates of credit growth seen in Saudi Arabia or Qatar. "Our relatively bleak outlook on new loan growth over the coming 18 months underpins our view that activity in the private non-hydrocarbon sector will remain weak, regardless of the country's improved risk profile since the start of the year," BMI added. "As the construction industry accounts for approximately 12 percent of the banking sector's loan books, our relatively downbeat outlook on the domestic real estate market not only bodes poorly for banks' ability to rapidly expand their balance sheets, but also raises significant risks about a deterioration in asset quality heading into 2012," analysts said. Latest data from the central bank showed loans to the construction sector declining 2.7 percent year-on-year in April, marking the seventh consecutive month of contraction. "With a host of major industrial and residential projects remaining on hold (if not cancelled all together), and the domestic real estate market unlikely to find a bottom until some point in 2012, the construction industry will remain a net drag on the banking sector heading into next year," the BMI report said. Going forward, BMI said its core view was a continued recovery in the banking sector, albeit one which is "relatively slow and uninspiring". Analysts said the biggest cloud which continues to lurk on the horizon stems from Dubai's debt overhang. __
