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2009 will be ‘far worse’ for GCC banks - analyst

Banking profitability in the region will fall sharply in 2009 as the global economy continues to deteriorate rapidly, the Kuwait Financial Centre (Markaz) said on Sunday.

The banking sector is likely to experience a contraction in deposits and loans, as well rising numbers of defaults on loans, causing a deterioration in asset quality, Mandagolathur Raghu, senior vice president of research at Markaz, told Arabian Business.
“2009 is going to be a far, far nastier year as far as banking is concerned,” Raghu said.

UAE banks would be hardest hit, due to their particularly high exposure to real estate and stock markets, he added.

Last month Moody’s downgraded its outlook for four UAE banks as a result of their exposure to these sectors and tightening liquidity.

Raghu said he anticipated further downgrades.

“The sectors to which banks have been aggressively lending, for example real estate and stock markets, are in the doldrums, so they will definitely stop giving money to these two sectors.”

An increasing number of defaults on personal loans are also to be expected, he added.

Income from charging interest - a primary source of any bank's income - would dry up, as liquidity remained under pressure and lending slowed, Raghu explained.

“The fee income will also be severely impacted, again because of the stock markets, lack of IPOs, lack of mergers and acquisitions, and lack of project finance,” he said.

Negative conditions are likely to persist for the rest of the year and would only start to ease once governments introduced specific measures to tackle the crisis, he said.

“We know that central banks are under enormous pressure to ease the burden of the banks. It’s not an easy process to kick-start," Raghu said.

"It may take some amount of negotiations back and forth between banks and central banks and that may well be into the first half of the year, by which time enough contraction of the balance sheets will have already happened in my view,” he concluded.

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