GCC Banking Sector Report - November 2009 (PDF)

Highlights:

· Profitability down, revival expected for full year 2009
The GCC banks (under our coverage ex-Bahrain) experienced a significant profit decline in 3Q09 as compared to the previous year; down 9%YoY for the quarter and down 13%YoY for the 9M09. We expect GCC banks to roll out a growth of 13 – 15% in 2009, not because of spectacular 4Q09 earnings but due to dismal 4Q08 performance weighing in on the 2008 bottom-line.

· Net interest income is robust
The top-line of the banks in the GCC improved significantly, despite the economic woes haunting their respective countries. Figures reveal that NII grew 13%YoY for the 3Q09 and an even higher 19%YoY for the 9M09 periods.

· Provisions play havoc with earnings
Heavy provisioning remained the theme common to all banks in the GCC as deteriorating asset quality went unhindered and turned into the biggest nightmare for the lenders in the GCC. Aggregate provisions taken by the GCC banks increased approximately 3-folds in the 3Q09 on a YoY basis and more than doubled YoY for the 9M09 period. Provisions in 3Q09 which remained relatively unchanged QoQ, eroded 22% of the aggregate total income (net-interest income + non-interest income) of GCC banks.

· Spreads are headstrong but are expected to come under pressure
The spreads of banks in the 9M09 on the whole remained headstrong and contributed majorly to the improvement in the NII. Spreads have increased despite a decreasing interest rate scenario, given that banks are less willing to lend while demand still exists, focusing more on managing the quality of existing loans rather than lending in a challenging economic environment; while the capacity to lend exists, the willingness does not.


· Recommendation – OVERWEIGHT on Qatar & UAE; MARKETWEIGHT on others
We maintain a positive outlook on the GCC banking sectors of Qatar and UAE underpinning our stance with an OVERWIEGHT rating. We however remain skeptical over the relative positioning of the remaining banks in the region. While most banks in Kuwait and a few in Oman seem expensive, many banks in UAE and Qatar seem attractive on a comparative basis.