Top Mideast banks put aside $7bn for bad loans in H1

LOAN PROVISIONS: A study of 25 of the Middle East's leading banks has shown that provision for loan losses reached a peak in the first half of the year. (AFP)

Loan loss provisions of 25 of the Middle East's biggest banks reached almost $7bn in the first half of 2009, a new study has showed.

The growth rate of Middle East banking revenues also slowed in H1 but performance was still better than their international counterparts, according to a new report by The Boston Consulting Group (BCG).

It said banking profits in the region fell further below 2005 levels due to significant loan loss provisions.

The new study is the second index, part of BCG's annual banking and retail banking indices measured by the development of banking revenues and profits for leading global banks.

The second edition of the index covers 25 banks and includes the biggest banks from all GCC states.

The index revealed that Middle Eastern banks have increased loan loss provisions (LLPs) "very significantly", often exceeding an annual growth rate of 100 percent over the last four years.

Dr Reinhold Leichtfuss, senior partner & managing director, BCG Middle East, said: "It is likely that LLPs will remain on a high level during the next few quarters due to the impact of the financial crisis on the real economy - both in the corporate as well as in the retail segments.

“It will be interesting to see how banks will cope with the Middle East-specific risks during the next 18 months. Needless to say, upgrading the risk management systems along all risk dimensions has become a matter of urgency for banks – together with restructuring capabilities. Well functioning credit bureaus are a must and they are overdue.

"When compared to some western countries such as the UK where, according to estimates, the banking system may have to reserve £130 billion of LLPs, this figure [$7 billion] still seems low.”

In BCG’s latest study, 20 banks in the region still grew in terms of revenues, 17 banks incurred a reduction in profit growth, while eight banks were still able to grow their profitability.

Out of the banks with a separate retail and corporate segment, in retail, four grew in terms of revenue, while eight incurred revenue losses. In corporate banking, seven banks grew while three shrank.

A segment analysis of banks in the GCC showed that retail banking revenues stagnated in the first half of 2009, but retail banking profits fell less strongly than total banking profits.

"Thus, retail banking has been a stabiliser of revenue and profit development for banks in the Middle East, which was also the case around the globe," the study added.

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