At a time when many major financial institutions around the world are struggling with crippling losses from the U.S. sub-prime crisis and credit crunch, Gulf banks are expected to buck the trend this year, announcing record profits thanks to an ongoing economic boom.
According to analysts, most of the region’s banks reported increased profits in 2007, with the exception of Saudi banks which were involved in unprofitable stocks brokerage. However, results by banks in the Kingdom and other Gulf Arab states for the first quarter of 2008 reflect a strong start for the year, and suggest that 2008 could be a bumper year for banks across all the Gulf Cooperation Council (GCC) states.
“All indications point to better performance by GCC banks this year, including Saudi Arabia’s banks,” said Gulf-based economist Mohammed Al Asumi. “First quarter results by some banks in Saudi Arabia and other GCC states are a strong indicator that 2008 will be better than 2007.
“There might be a little negative impact on the banks from the interest rate cuts as part of their assets are in dollars, but I don’t think this will largely affect their performance this year,” he continued. “There are several factors that overshadow the interest rate cuts and other negative elements, mainly the high oil prices, the upswing in regional economies, and the surge in projects and domestic liquidity.”
Except in Saudi Arabia, where banks reported lower earnings, GCC banks made record profits in 2007 as a result of a sharp increase in business, mainly loans to projects in construction, real estate and other sectors. In the UAE, the combined profits of the country’s 22 national banks and 27 foreign units surged to a record $6.63 billion [USD] in 2007 from $5.35 billion in 2006. Profits of the Kuwait banks listed on the stock market jumped to $3.5 billion last year from $2.45 billion.
In Qatar, the net profits of the banks listed on the Doha Securities market shot up by more than 50 percent to $2.23 billion from $1.47 billion. Similarly, banks in Oman reported net profits of $489 million in 2007 compared with $380 million in 2006.
“In the UAE, the combined net profits of the banks could rise by 15-20 percent this year,” said Ziad Dabbas, a share-dealing adviser at the National Bank of Abu Dhabi. Saudi Arabia, which has the largest banking sector in the Middle East, was the only exception in the GCC as the combined profits of its banks dipped by nearly 15 percent to $8.13 billion in 2007 from around $9.5 billion in 2006, according to bank balance sheets. Riyad Bank was the only bank that reported an increase of around 3.5 percent in profits in 2007.
Despite such encouraging signs, the Gulf region was not totally immune to the credit crisis as a handful of banks unveiled losses. One of them was the Manama-based Gulf International Bank, which saw a loss of around $757 million. The loss, which the bank said was caused by the U.S. sub-prime crisis, prompted GCC government owners to inject $1 billion to raise its capital to $2.5 billion. Two other key financial institutions in the region, the Arab Banking Corp and the Gulf Investment Corp, also reported losses. According to bankers, the combined losses of the three institutions lay at around $1.5 billion. Losses were also reported by two other key financial institutions in the region – the Arab Banking Corp and the Gulf Investment Corp. According to bankers, the combined losses of the three institutions lay at around $1.5 billion.