Second quarter results for the Gulf’s major banks will continue to carry traces of last year’s capital market crash, with more challenges ahead at least for Saudi banks.
In many ways, the performance of Saudi, UAE and Kuwaiti banks is expected to mirror the performance of their local capital markets. While Saudi banks have been hurt by the near 12 percent drop in the Tadawul index, Kuwaiti banks have benefited from the 20 percent jump in the Kuwaiti index, while the UAE banks have also benefited from the single digit and double-digit surge in Dubai and Abu Dhabi markets respectively.
Ironically, though, capital markets may be the saving grace for Saudi bank earnings in the second quarter.
Sixteen initial public offerings (IPOs) raised nearly $4.1 billion in the second quarter, according to Zawya data, compared to the five IPOs that raised $1.47 billion in the same period last year — 12 of them in Saudi Arabia alone.
“The deceleration in brokerage income is being compensated with public flotation and advisory roles for companies that are looking to float publicly,” says Dr. Said Al-Shaikh, chief economist at Jeddah-based National Commercial Bank (NCB), referring to the 11.6 percent decline in the Tadawul this year.
Trade volumes too have declined massively, impacting on Saudi banks’ brokerage business. Bellwether Saudi Basic Industries Corp. (SABIC), for example, saw its average daily volumes scale new heights of 6.6 million in 2005, but has now declined to nearly 2.2mn on average in the first half of the year. That trend, more than anything else, has impacted earnings for Saudi banks.
Riyad Bank, for example, which generated $123 million (34 percent of operating income) in banking fee and commissions in Q1, 2006, raked in a little over half of that in Q1, 2007 with $66 million (20.6 percent of operating income).
Retail banking prospects in the Kingdom also seem to be limited, for now.
“We see consumer lending slowing, even declining as these curbs come into effect,” Al-Shaikh told Zawya.com.
The reason? Saudi Arabian Monetary Agency began reining in banks’ consumer loan excesses, and also reduced personal loan limits from multiples of 30 times an individual’s monthly salary to 17.
While retail banking in the Kingdom appears to cool off, investment banking has its own set of challenges, with the arrival of foreign banks.
In July, Bear Stearns and some Saudi executives unveiled an Islamic asset-management joint venture. In March, Morgan Stanley and Capital Group, a Saudi investment bank, agreed to form a Riyadh-based firm providing investment banking, capital markets and asset management services.
“Foreign financial institutions are better able to provide dollar-based funding to Saudi institutions, as their costs are lower,” says Al-Shaikh. “It does not mean that local Saudi banks can not compete with international triple A-rated banks, but their costs will be higher,” say Al-Shaikh.
While Saudi banks struggle, UAE and Kuwaiti banks are in much better shape.
Zahed Chowdhury, head of research at Deutsche Bank, argues there is tremendous room for growth in the seemingly saturated UAE retail banking sector, especially as penetration levels have not gone beyond credit cards and car loans. Tremendous opportunities exist in home loans, insurance and Islamic finance retail products. On the corporate side, project financing, debt funding and Islamic finance are all key growth areas.
“If you are making a comparison from the days of 2006, then yes, results may not look that good. But removed from that comparison, the banking sector is extremely strong,” says Chowdhury, who wrote a report on UAE banks earlier this year, titled Life After Capital Markets.
“There has been a general deflation of capital market related earnings, such as a decrease in IPO lending and capital gains from investment portfolios,” says Chowdhury. “That should continue to be a feature of the second quarter. But retail and corporate growth expected to remain strong, and are producing organic growth in bank sector, in addition to debt funding.”
Government-sponsored infrastructure projects are expected to be the main driver for balance sheet growth, while greater product development for both corporate and retail is also expected to improve fee income.
Deutsche Bank expects a 26 percent upside potential for Abu Dhabi Commercial Bank and 25 percent for National Bank of Abu Dhabi in stock prices by the end of the year.
Kuwaiti banks are also expected to perform well during the second quarter. “Asset growth should remain strong in the quarter, although spreads could decline,” says Arun Thirumalai, an analyst at BankMuscat, which has a buy rating for the six major Kuwaiti banks, including National Bank of Kuwait and Kuwait Finance House.
“More than 150 billion Kuwaiti dinars worth of projects is coming on line in real estate, which should keep the Kuwaiti banks busy,” says Thirumalai.
BankMuscat expects a net profit growth of 16 percent for Kuwait’s commercial banking sector in the year, much lower than the 23 percent growth posted in 2006.
Higher provisioning of loans though, could spring a surprise for Kuwaiti banks, especially as they have been over-lending in the past three to four years. “This could affect expenses later this year, especially as the Central Bank puts some pressure on banks — this could impact the next quarter,” says Thirumalai.
Over-lending is not an issue limited to Kuwaiti banks. Last month, Qatar Central Bank issued an order to restrict Qatari bank loans to QR2.5 million and the repayment period to seven years. Repayments of loans are restricted to 70 percent of a person’s salary from 75 percent earlier.
The National Commercial Bank emerged as the leading bank in the region with total assets of $44.7 billion at the end of the first quarter, according to Zawya research. NCB was also in pole position in net profits, generating $494 million in Q1. Saudi Arabia’s Al-Rajhi Bank was the leading revenue generator with $643 million.
In terms of total assets, seven Saudi and seven UAE banks in the top 20 commercial banks are in the list. Three Kuwaiti, 2 Bahraini and 1 Qatari bank make up the list.
Overall, the combined net profit for the top twenty banks fell by about five percent in the first quarter.
The Gulf’s top 20 commercial banks posted a combined net profit of $6.4 billion in the second quarter of last year. Thirumalai expects major Gulf banks’ total assets to rise by around 15 percent this year, but with shrinking profit margins.
(Yadullah Ijtehadi is managing editor, Zawya.com, Dubai.)
