Banks in Dubai and Kuwait will endure a tougher 2010 than their Gulf peers as lenders in the region continue to take provisions against bad credit, which will curtail profits, ratings agencies said.
“We believe that 2010 will be another difficult year for Gulf banks as they continue to clean up their loan books — an effort that will weigh on their financial performance,” ratings agency Standard & Poor’s (S&P) said late on Monday.
The United Arab Emirates banks’ specific provisions for non-performing loans (NPL) stood at 33.4 billion dirhams (USD 9.09 billion) in January 2010, a 64% surge from a year earlier, according to Central Bank data released on Tuesday.
“We see a growing disparity in credit quality among banks in the Gulf, between the stronger Saudi and Qatari banks on the one hand and the relatively weaker Dubai, Kuwaiti, and Bahraini investment banks on the other,” said S&P credit analyst Mohamed Damak.
Banks in Qatar and Saudi Arabia, both major oil exporters, are expected to outperform the sector, underpinned by bullish economic growth prospects.
The UAE economy is likely to see growth of zero to 1% this year, the International Monetary Fund recently said. Saudi Arabia and Qatar are seen growing by 3.8% and 16.1%, respectively.
Still recovering from a sharp property downturn, Dubai-based banks, including Emirates NBD, are among the lenders, with the most exposure to Dubai World, the state-owned conglomerate that is restructuring USD 22 billion in debt.
Moody’s said on Monday it estimated the total exposure of United Arab Banks to Dubai World to be about USD 15 billion.
Kuwaiti banks are also suffering from a domestic real estate slump and analysts expect credit conditions to remain difficult in the next 18 months.
Moody’s has a negative outlook for the Kuwaiti banks, warning that the economy, despite large-scale government stimulus plans, remains undiversified and relies too heavily on its oil sector.
Kuwait’s Gulf Bank said it expected to make an operating profit in 2010, which well help it absorb additional provisions, after it narrowed its losses in 2009.
In the long run, Gulf banks are poised to grow more, helped by favorable demographics, rising oil revenues, government investments and low banking penetration levels, according to a study by consultancy firm AT Kearney.
“The economic crisis might result in a boon for the GCC banking industry, which should not be wasted,” the report said.