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GCC Commercial banking 2009/2010 : Review and projections

Most of the time, projections are not reviewed. We are going to do the exercize as the review is the best way to understand what has happened and what may happen. You will find on the side the figures to follow up, just click on the "GCC 2009/2010 in figures" button. You will get 4 tables and you can navigate from one to another with the buttons you will find at the bottom of the page.

2009 Worldwide economic context - Reminder

Recession or slow growth, low inflation, rising unemployment, rising sovereign debts and specific worries on Iceland, Greece, …, huge bank bailouts, historically low interest rates and a strong performance of most indexes (stock markets and raw materials) and worthwhile to mention, a strong increase in the gold index following several central bank purchases and the fear from investors about the future of fiat money.

2009 GCC Commercial banking performances

Overall very fine considering the difficult environment, as can be seen in Table 1. Total estimated revenues increased by 4.16% at USD48.6bn and total estimated net profits declined "only" by nearly 11% at USD17.1bn. It could have been a lot worse without the support from the governments.

As you will in see Table 2, most of the projections were in line, especially profits. Bahrain and Kuwait are traditionally more sensitive to investment revenues and delivered slightly lower performances than anticipated, KSA maintained both satisfactory levels of activities and profits. The big difference between revenue projections and actual performances comes from the UAE.

In fact, we were anticipating a strong decrease in revenues and profits taking into account the difficult economic context and the expected impact on the books of banks' heavy committment to the real estate market. The most important element which led to deliver these performances are the government cash injections provided to banks. The direct effect of the measure has been a significant reduction in the cost of funds.

Finally, it is important to mention GCC bank customers "suffered" in 2009 as banks clearly worked on their P&L to generate more revenues. As a consequence, they felt the crisis a bit more with various increases in price, probably for the same service.

2010 Worldwide outlook

2010 first quarter highlights our fears especially about hyper-speculation. Net profits from big American banks showed impressive results together with decline in revenues and rising provisions as most of the profits came from market activities. Goldman Sachs achieved on its own a net profit equivalent to 77.5% of the aggregated net profit for the GCC region with USD13.4bn and cumulated with JP Morgan, they achieve together 146.8% of the all region (USD25.4bn). At the same time, smaller banks still suffer from their bad loans and the number of American failed banks increased to 35 end of March 2010 from 21 for the same period in 2009, a 67% increase. Although this figure will still be important as the recovery comes, it needs to stabilize before reflecting a good trend.

Since the beginning of the year, European and American stock markets are volatile with no clear direction. There are rumors of attacks on currencies, gold is still high but well under its November 2009 peak. Gold is currently captivating attention from all over the planet for two major reasons : a global bad feeling over the worldwide economic imbalance and rumors on the avaibility of gold for physical delivery should investors request this option.  European economies' weaknesses are still a big threat to recovery, especially if individuals start withdrawing their savings from the banks like recently observed in Greece.

There is still a risk for a major correction on stock markets in 2010 ...

2010 should prove difficult again.

2010 GCC outlook

2010 will not be easy but better than 2009 as there are good signs, especially the oil price who will support governments' spendings and investments if it remains around its current level throughout the year. 2010 projections for GCC commercial banks are prudent with anticipated total revenues of USD50.1bn and total net profits of USD16.9bn (see Table 1). They reflect improvement in growth rates, potential additional failures and provisioning. Although funds seem to be available, confidence still needs to be restored at higher level as investors remain prudent overall. Big oversubscriptions are not any more the rule when debts are issued.

Three key subjects will probably guide discussions this year : risk management, the improvement of current operations and the development of new products and markets.

When looking at the recruitments or the development of consulting services in this area, it becomes obvious risk management is a key subject. We hope the region will contribute to build or improve credit history/information to provide banks with accurate tools to tune their risk policies. At the end, it will benefit all finance actors.

On the improvement of current operations, it will be key for banks especially in markets with strong competition, to work on customers' satisfaction. If they get the feeling they contribute financially more for less, they could be tempted to move from their present banks to new ones. Customer retention will definitely be a key element of strategies.

On the development side, our preferred areas remain those privileging the financing of assets (housing and equipment especially) to the economic actors who contribute to produce value or invest in their own needs by opposition to speculation. There is plenty of room in the Middle-East to develop current activities or invest in new ones, and as previously mentioned, particularly in the SME sector which could be the best contributor to sustainable growth and employment. The banks who do not specifically wish to extend business in these areas will have to look for significant growth outside the borders.