Friday 25 May 2018

ME banks loan loss provisions balloon to $7bn

Manama, October 14, 2009

The Middle Eastern banks have boosted their loan loss provisions (LLPs) in a big way, with the top 25 banks in the region alone building provisions of almost $7 billion, said a new study by The Boston Consulting Group (BCG).

A global management consulting firm and a leading advisor on business strategy, BCG, said in its study that 'these LLPs often exceeded an annual growth rate of 100 per cent over the last four years and in fact, many banks reached a peak in the first half of 2009.'

The banks in Kuwait and the UAE had to build the highest share of their revenues as provisions, the new study pointed out.

The study is part of BCG's annual banking and retail banking indices measured by the development of banking revenues (operating income) and profits for leading global banks.

In April 2009, BCG launched the first edition of the banking performance index in the Middle East, creating a customized index specifically for the Middle Eastern banking markets, with 2005 revenues and profits as starting benchmarks.

The index covered the largest banks in Bahrain, Kuwait, Qatar, Saudi Arabia and the UAE. The second edition of the index, announced today, covers 25 banks and includes the biggest banks from all GCC states, including Oman.

According to BCG, the banks in the Middle East region continue to be less affected by global crisis than international banks. However their profits have fallen further below the 2005-levels mainly due to significant LLP, it said.

'The growth rate of banking revenues has been slowing down in the Middle East in the first half of 2009. While the overall growth rate of banking revenues was still positive, banking profits continued to fall further below 2005 levels due to significant LLPs.'

Commenting on how the high levels of LLPs will impact Middle Eastern banks in the near future, Dr. Reinhold Leichtfuss, senior partner and managing director in BCG's Dubai office, said: 'It is likely that LLPs will remain on a high level during the next few quarters due to the impact of the financial crisis on the real economy - both in the corporate as well as in the retail segments.'

'When compared to some western countries such as the UK where, according to estimates, the banking system may have to reserve £130 billion ($207.5 billion) of LLPs, $7 billion still seems low,' he remarked.

As with similar studies in other parts of the world, there is variance amongst the market participants in BCG’s latest study: 20 banks still grew in terms of revenues, 17 banks incurred a reduction in profit growth, while 8 banks still were able to grow their profitability.

Out of the banks with a separate retail and corporate segment, in retail 4 grew in terms of revenue, while 8 incurred revenue losses. In corporate banking, 7 banks grew while 3 shrank, it added.

A segment analysis of banks in the GCC shows that retail banking revenues stagnated in the first half of 2009, but retail banking profits fell less strongly than total banking profits, the study said.

BCG’s analysis of each country and individual bank shows divergent patterns. Banks in the UAE and Qatar had the highest revenue growth rates of Middle Eastern banks in the first half of 2009. Qatar is the only country with a significant growth rate in profits, the study pointed out.

'The banks in Kuwait and the UAE had to build the highest share of their revenues as provisions. By now, most banks have realized that more than one percent of their loans are non-performing - others will have to follow soon,' Dr Leichtfuss stated.

“It will be interesting to see how banks will cope with the Middle East-specific risks during the next 18 months. Needless to say, upgrading the risk management systems along all risk dimensions has become a matter of urgency for banks – together with restructuring capabilities. Well functioning credit bureaus are a must and they are overdue,” he added.-TradeArabia News Service

Tags: study | BCG | loan loss provision | Middle East bank |

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