Fuelled by the economic boom and the rally in oil prices which resulted in the accumulation of huge reserves by the GCC countries, the banking sector witnessed double digit growth in its loan portfolio and deposit base over the period 2004-2008; loans grew at a five-year Compound Annual Growth rate (CAGR) of 32 per cent to reach $609 billion at the end of 2008, while total deposits grew at a slower pace with a five-year CAGR of 27 per cent to reach $725 billion at the end of 2008.
However, growth in loan portfolio and deposits lost momentum during the first nine months of 2009 with a marginal increase for each of two per cent. This slowdown in the growth of credit and deposit base was mainly triggered by the adverse impact of the financial turmoil on different economic sectors along with tight credit markets and the extensive losses that have been incurred by the GCC equity markets since the intensification of the financial crisis in September 2008.
The loan-to-deposit ratio, as set by central banks in the GCC region, varies among countries and plays a vital role in the lending policy of commercial and Islamic banks; In Abu Dhabi, the loan-to-deposit ratio as of 30 September 2009 has exceeded the mandated level set by the Central Bank of the UAE which is currently at 100 per cent.
The loan-to-deposit ratio for the banking sector in Abu Dhabi continued its upward trend over the last two years to reach a maximum of 102 per cent as of September 2009, up from 101 per cent and 92 per cent at the end of 2008 and 2007 respectively.
This significant increase in the loan-to-deposit ratio was fuelled by the growth in credit to finance real estate and infrastructure projects along with the low-growth rate in deposits over the same period; the surge in the loan-to-deposit ratio during 2008 is mainly explained by the 32 per cent increase in credit facilities versus a 26 per cent increase in the deposit base with banks. Fuelled by the economic boom in the country, Qatari Banks have also exceeded the limit set by the Central Bank of Qatar, which currently stands at 90 per cent, by around 1100 basis points.
On the other hand, Saudi banks enjoy the lowest loan-to-deposit ratio, which was recorded at 73 per cent as of 30 September 2009 compared to a ceiling of 80 per cent as set by the Saudi Arabian Monetary Authority (SAMA). This gives the banking sector in Saudi Arabia an edge to expand its credit portfolio with room to lend an additional $33.2 billion.
Moreover, the banking sectors in Dubai and Kuwait both enjoy room to extend additional credit of $10 billion and $8 billion without breaching the limit for the loan-to-deposit ratio set by the central banks in both countries which stand at 100 per cent (for Dubai) and 85 per cent (for Kuwait) respectively.
Aggregate deposits with the GCC banking sector
The GCC banking sector continued to post solid growth in its deposit base in line with the banks’ expansion strategies across the region in attracting further customers and augmenting its capital size; consequently, total deposits registered a CAGR of 27 per cent over the period 2004-2008, with the highest yearly growth of 38.6 per cent reported in 2007 to stand at $604 billion compared to $436 billion and $282 billion registered at the end of 2006 and 2005 respectively.
The sustainable surge in the deposit base was mainly on the back of the economic growth in the region during that period, along with an increase oil prices, the availability of liquidity in the market, as well as high yields on the deposits offered by banks to increase their deposit bases and in turn increase their loan portfolio to boost their interest incomes.
On the other hand, given the market financial conditions mainly in Q4 2008, aggregate deposits at GCC banks grew by 20 per cent year on year (y-o-y), to stand at $724.7 billion at the end of 2008. Furthermore, the slowdown in the total deposits’ growth stepped up during the first none months of 2009 (9M-09), to reach $740 billion as at September 2009, growing by a marginal 2.1 per cent compared to December 2008.
Total deposit growth during 2008 was mainly spurred by investors’ lack of confidence in the stock market where risk has been elevated due to the high fluctuations in asset prices triggered by the financial and credit turmoil which hit the global financial system, and hence investors preferred low yield bank deposits as an alternative to risky investments in the stock market. However, with the intensification of the crisis and the liquidity shortage that prevailed in the market, total deposits continued to grow, yet at a drastically lower pace.
On a country basis, despite the drop in deposits in Saudi Arabia’s banks, it still holds the largest deposit base among its GCC peers with a percentage contribution of around 38 per cent of the total GCC deposit base or around $283 billion as of September 2009.
The banking sector in the UAE followed with a percentage contribution of 30 per cent (a deposit base of $221 billion), while the Kuwaiti banking sector maintains its third largest position with a percentage contribution of the total deposit base in the GCC region of 17 per cent, equivalent to $124 billion as of September 2009.
Loan portfolio of the GCC banking sector
Net loans and advances extended by the banking sector in the GCC region posted a solid and healthy growth over the 2004-2008 period, growing at a CAGR of 32 per cent, indicating the consistent and significant upward trend in the loan portfolio of all the banking sectors in the GCC countries, with no exception, that had been witnessed over the same period.
All the countries have witnessed sustainable growth in their banking sectors’ loan portfolios over the 2004-2008 period with the highest growth being noticed in Dubai & Qatar as banks’ loan portfolios grew over the same period at a CAGR of 65 per cent and 47 per cent respectively.
This significant increase in credit was mainly fuelled by the economic boom that the GCC countries enjoyed over the last four years and was supported by the rally in oil prices along with ample liquidity in the credit markets, a significant appreciation in the price of financial assets and the increasing interest in the property market which pushed prices upward to unprecedented levels.
The banks’ aggregate loan portfolios surged by 30.4 per cent during 2008 to $609 billion as of December 2008. However, amid the intensification of the global financial meltdown and credit turmoil during Q4-08 and 9M-09, all banks in the GCC region became more reluctant to extend additional credit to their customers, with tight credit policies being adopted, triggered by the mounting risk of default by several investment and conglomerate groups and property developers.
The situation has led to a sharp slowdown in the growth of loan portfolios which stood at $622 billion as of 30 September 2009, growing by a mere 2.1 per cent during 9M-09.
The breakdown of loans among the six GCC countries showed that as of 30 September 2009 the UAE Banking sector has the biggest share with a 34 per cent market share of loans, equivalent to a value of $213 billion, while the banking sector in Saudi Arabia follows with a percentage contribution to total loans of 33 per cent or around $207 billion. The Kuwaiti banking sector is the third largest sector, judging by the size of its loan portfolio with a market share of 16 per cent or around $98 billion.
Loans extended by banks in Dubai witnessed the highest growth rate over the 2004-2008 period to grow at a five-year CAGR of 65 per cent; loans surged from $14 billion at the end of 2004 to $102 billion as of December 2008. However, no growth was noticed in 9M-09 due to the elevated default risk, flight of international capital along with the slump in property prices, the devaluation of financial asset prices and the slump in the stock market.
In Qatar, the aggregate loan portfolio of Qatari banks grew at a healthy CAGR of 47 per cent over the same period to reach $60 billion as of December 2008. The economic boom along with the government’s huge spending on infrastructure and real estate projects fuelled the demand for credit.
Despite the notable slowdown of credit expansion during 9M-09, the Government is expected to maintain its capital spending on health, education and transport that will act as a catalyst for the credit growth over the coming few years.