The aggregate profits of the GCC sector posted a decline of 5 percent year on year (YoY) and 10 percent quarter on quarter (QoQ) in 2Q10, Kuwait-based Global Investment House said Wednesday. Poor bottom-line performance was exhibited by UAE banks that declined by 30 percent YoY with a further dampening act coming from Saudi banks which were down by 7 percent YoY. Being heavyweights within the GCC banking universe, profitability (2Q10 profit share of 19 percent and 46 percent respectively), banks indigenous to these two countries led the slide in overall profitability of the GCC aggregate, while those from the remaining countries fared much better. Banking sectors of Oman and Kuwait earned the spotlight with growth of 40 percent YoY and 34 percent YoY respectively. The aggregate net interest income of GCC banks grew by a meagre 1 percent YoY, spelling out stagnancy in the top-line. The loss in momentum came about as sheer stagnancy in loans haunts the GCC banking sector while NIMs stayed under pressure. Loans growth remained diminished, growing 3.5 percent YoY in 2Q10 and 0.7 percent YTD. Similarly aggregate interest earning assets grew 3.4 percent YoY and 0.6 percent YTD. Moreover, aggregate NIMs of our GCC banking universe tapered-off by 12bps over 2Q09. Different movements in net interest income (NII) were seen from country to country with Saudi Arabia and Qatar at the opposite ends of the spectrum with a 9 percent YoY decline and a 26 percent YoY jump, respectively. Qatar's NII rode well due to a 46 percent YoY jump is QNB's top-line. Shrinkage in the vicinity of 4 percent YoY was also in the NII of Kuwaiti banks while that of UAE exhibited a healthy growth of 9 percent YoY. Meanwhile, Omani banks remained relatively stagnant with an increase of just over 2 percent; an outcome of opposing movement in spreads and volumes. Total earnings growth of the GCC banking sector came under considerable pressure owing to continuation of high provisions during 2Q10. While the top-line barely moved YoY, provisions grew by 5 percent YoY. Provisions, mostly emanating from loan defaults, shifted gears during the quarter under review, after taking a breather in 1Q10, leading to a massive 48 percent QoQ rise in 2Q10. UAE stood out given the fact that almost half the provisions taken in 2Q10 came from its banks followed by Saudi Arabia which contributed 23 percent to the provisions taken. Almost all UAE banks within our universe witnessed a high growth in provisions, led by ENBD and ADCB which were most affected by exposure to Dubai World and related entities. The case in Saudi Arabia was different with a majority of banks portraying an ease-off in provisions except for SIBC, SABB and RIBL. “Albeit, these banks have not indicated the reason behind the jump in provisions, we suspect these could be related to exposure to Sa'ad and Algosaibi. Within Kuwait, banks in general saw a decline in provisions YoY, as 2Q09 was a bad quarter in terms of high provisioning requirements coming from Sa'ad and Algosaibi. Provisions also came from troubled investment companies. Furthermore, NBK seems to be the only Kuwaiti bank to have attained pre-crisis provisions levels while maintaining a high coverage ratio. However, provisions of KFH and Gulf Bank stayed high; Gulf Bank's management, nevertheless stated that 2H10 will be much better in terms of provisions, hinting at a switch in provisioning regime,” the report noted. The rise in aggregate provisions took a toll on aggregate earnings, eroding as much as 25 percent of the total GCC banking profit. The effect was more profound in the UAE banking aggregate where 41 percent of the total income was lost to provisions. The second highest in at least the last 15 quarters. Among all countries only Oman's provisions seem to have returned to normalized pre-crisis levels while that of the remaining countries are still considerably high. The GCC banking sector is expected to show an increase in provision in the coming quarters, related mostly to those trickling in from UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to exposure to Dubai World and related entities. “Albeit ADCB, one of the most exposed banks to DW and related entities has already taken the hit in 2Q10, other banks are still to follow suit. Moreover, additional provisions are expected due to changes in the central bank's regulations. While profitability of UAE banks in 2H10 is expected to be lower than the first half, we may see that of other countries to fare better, with easing off provisioning requirements,” the report added.
