By Neeraj Gangal
Lending remains weak as banks hold huge amounts of idle cash - report.
Despite the relatively upbeat regional economic outlook, large parts of the GCC banking sector still appear to be struggling, according to a recent report.
Citing a recent GCC brief by International Bank of Qatar's (IBQ) Qatar-based The Peninsula daily said that bank lending remains weak and institutions are holding a large amount of idle cash and that banks remain cautious about taking on new risks, while higher provisioning continues to hit profitability.
According to the daily, recent turmoil in global and local equity markets has damaged investment portfolios. The brief added that an improvement in banking sector conditions is likely to be moderate and gradual, with banks slowly nursing their balance sheets back to health.
The Peninsula said that IBQ’s latest GCC Brief stated that in late 2009, one year following the eruption of the global financial crisis, a widespread consensus emerged that risks facing GCC economies and banks were dissipating and that a solid recovery would be underway.
At that time, most major indicators across the region including oil prices, consumer and business confidence surveys, and equity prices gave support to that view, it added.
According to IBQ, until now, and despite pressures facing Greece and other highly indebted countries in Europe, the GCC region's positive economic outlook seems unlikely to be significantly derailed and the recovery should stay on track, says IBQ.
The GCC economies are expected to post over 4 percent real growth in 2010, following an estimated 0.5 percent contraction last year, it added.
In that context, GCC regional banks outperformed in 2009 relative to their peers elsewhere. The anticipated recovery of regional economies, as well as the comfortable levels of liquidity, is supposed to boost the performance of banks in 2010, especially on the lending side, after the sharp slowdown in 2009.
However, banks continue to hold excess idle cash as a result of slow lending activity, the brief said. This is not only affecting profitability, but also is expected to weigh on growth of the private sector, it added.
“ As of March 2010, credit extended by GCC banks to the private sector was up only 1.2 percent year-on-year, much slower than the 18 percent of a year ago. This deceleration took place despite the absence of any new regulatory constraints and despite the reported improvement in overall confidence. Since December of last year, credit growth ranges from a negative 1.1 percent in Bahrain to +2.7 percent for Qatar. Though modest, the aggregate growth in GCC credit is at its strongest since October 2009, providing a small sense of potential recovery,” The Peninsula noted.
The IBQ report added that deposits at regional banks rose by an aggregate 5.3 percent during the same period, as a result of seven percent growth in private deposits and a 3.9 percent drop in government deposits.
“The IBQ report concluded that GCC banks enjoy a surplus of cash and other liquid assets, but not too many sound investment or lending opportunities, at least for now. In line with the economic recovery, improvement for the banks is likely to be moderate and gradual, while at the same time providing banks with an opportunity to nurse their balance sheets back to health,” The Peninsula said.
The headline of this article is sensationalist and it is exactly this type of commentary in the media that fuelled the exuberance of bankers before the mighty crash of 2008. Being prudent to lend money is not necessarily a bad thing. Sitting on cash dont mean banks are necessarily struggling. I think the world's commentators miss an important element when they make their predicitions... that of Human Behaviour. A lack of real job security has caused bankers to act with less impunity and a lot more circumpection. They are not going to enter into any transaction that might just have a whiff of risk, notwithstanding what the fundamentals say or the outlook look like. Therefore, the GCC banking sector should brace itself for a further slowdown and this will continue until such time that bankers are released from the fear that currently grip them.