JEDDAH/DUBAI – GCC banks are likely to report four percent YoY earnings growth in 1Q13, SICO Research's latest report on GCC Banks 1Q 2013 result revealed Tuesday. It said weaker earnings are forecast for Saudi banks on the back of lower fee income and tightening margins, yet Saudi banks' long term fundamentals remain strong. SICO expects KSA banks' aggregate 1Q13 earnings to moderate to 2.6 percent YoY, as strong balance sheet growth will be offset by lower margins due to stiff competition and lower fee income. Saudi stock market turnover declined to $100 billion in 1Q13 from $279 billion in 1Q12, which is likely to adversely impact their trading-related fee income. On the other hand, Saudi banks' balance sheet growth is likely to remain robust, with loans and deposits growing at 12.6 percent YoY in 1Q13. Saudi banks' loan-to-deposit ratios are near the SAMA regulated level of 80 percent - with Samba's exception - and most banks are likely to offer competitive rates to attract deposits to fund their lending growth. SICO estimates that a lending growth of 2.6 percent QoQ in 1Q13 will outpace a relatively modest deposit growth of 0.8 percent QoQ, thereby further increasing their leverage. As such, SICO expects Saudi banks' net interest margins to come under pressure, although balance sheet growth is likely to offset the impact on interest income. Qatari banks to report weak balance sheet growth with expected rise in impairment charges. UAE banks are likely to report stronger earnings benefitting from moderating impaired loans and lower cost of funds, it said. UAE banks' expected earnings improvement already priced in, while 1Q13 results unlikely to provide any positive trigger for Qatari banks. GCC banks under SICO's coverage are likely to report four percent YoY earnings growth in 1Q13 compared to same period last year. Qatar National Bank, First Gulf Bank and United National Bank are likely to report better financial performances than their peers during the first quarter. SICO estimates that GCC banks' balance sheet growth to remain muted in 1Q13, with an overall 1.5 percent QoQ lending growth, despite Saudi banks' expected healthy loan growth of 2.6 percent QoQ. Although Qatari banks' lending growth is likely to appear strong at 23 percent YoY, most of it was achieved in the last three quarters, and we expect a -0.1 percent QoQ contraction during the quarter. SICO said it expects KSA and Qatari banks to report margin (NIM) pressure, while UAE banks' margins should expand. Saudi banks will have to offer more competitive rates to capture deposits and retail market-share, which will negatively impact their NIMs. Qatari banks are likely to earn lower yields on lending to Government-supported projects. UAE banks are expected to report NIM expansion, as UAE interbank rates have declined over the last year, which is likely to lower their cost of funds and boost their NIMs. Most UAE banks have reported a stabilization in asset quality, and SICO expects to see provisions tapering down in 1H13. In contrast, it expects Qatari banks to witness asset quality deterioration related to their rising real-estate exposures. Saudi banks' asset quality remains robust, and defaults by contracting companies such as MMG are unlikely to be repeated “We remain bullish on Saudi banks, turning neutral on UAE banks; UNB, QNB and SABB are our favorite picks,” said SICO. “We remain bullish on Saudi banks, and believe that mortgage law's much awaited implementation and sustained Government spending will be positive for the banks. We prefer SABB, Samba and ANB among Saudi banks. “Among UAE banks, we prefer FGB on strong fundamentals and UNB on attractive valuations. We believe QNB is best placed to continue its robust balance sheet growth, with a strong capital base, Qatar Government support, and low operating leverage.” UAE banks are likely to report a five percent YOY earnings growth in 1Q13, supported by lower provisioning charges and improving margins. All UAE banks covered by SICO, with the exception of ENBD, reported an improvement in NPL coverage in 4Q12. The NPL coverage of ADCB, FGB and NBAD in 4Q12 was greater than 90 percent, while it was at 80 percent for UNB and 66 percent for ENBD (adjusting for their Dubai GRE exposure). ADCB, FGB and NBAD are likely to show signs of a tapering loan-loss provisioning this quarter, while SICO expect UNB and ENBD to strengthen their loan-loss reserves by continuing their provisioning trend. The UAE 3M-interbank rate declined by 27bps YoY to 1.26 percent in 1Q13, lowering the funding cost for UAE banks to some extent, and leading to net interest margin (NIM) expansion. With ample liquidity and strong capital positions, UAE banks are paying off the expensive Government funding, which is likely to further boost their NIMs. However, SICO expects to see a greater impact of these steps in 2Q13. Qatari banks are likely to take a breather in 1Q13 after reporting strong balance sheet growth for the past ten quarters, said SICO. It expects lending growth to remain flat in 1Q13. The Government is likely to infuse deposits into the system to support lending, which SICO believes will benefit QNB the most. – SG
