Gulf Banks Feel the Pain as Investors Wonder What Will Come Next

  • Lenders from Saudi Arabia to U.A.E. posted lower earnings
  • Price-to-book for index of Saudi lenders drops 25% in a year

Banks from Saudi Arabia to Dubai are feeling the pain of the Middle East’s slowdown.

Many of the region’s largest banks missed analysts’ earnings estimates in the third quarter as lenders provisioned for higher bad loans and funding costs increased. National Commercial Bank, Saudi Arabia’s largest lender, said profit fell 1.5 percent to 1.96 billion riyals after impairment charges increased. Emirates NBD PJSC, the United Arab Emirates’ biggest bank, posted a profit of 1.66 billion dirhams, missing analyst estimates for earnings of 1.83 billion, after provisions increased at its Islamic unit.

The slump in crude prices has sparked a wave of budget cuts across the oil-rich Gulf region, prompting economic growth to slow and liquidity problems for banks accustomed to relying on countries’ excess energy receipts for funding. Government delays in paying contractors in Saudi Arabia and defaults among small and medium-sized enterprises in the U.A.E. are contributing to rising provisions, while funding costs in Saudi Arabia are at a 7-year high.

“Banks have had to deal with tight liquidity, asset-quality concerns and fees not rising as much as expected because of lower transaction volumes,” Sanyalak Manibhandu, head of research at Abu Dhabi’s NBAD Securities, said by phone. “Banks may be able to start passing on higher funding costs next year, but non-performing loans will continue to be an issue.”

‘Historic lows’

Saudi banks may not yet have seen the worst of the pain as the government embarks on a wave of spending cuts to infrastructure budgets, energy subsidies and public-sector salaries. The kingdom’s banks face rising non-performing loans over the next 12 months, mostly because of cutbacks in the construction sector, Moody’s Investor’s Service said last week.

“The rise in provisioning has come earlier than expected, and Saudi banks have also been hit by a drop in non-interest income as the economy has slowed and revenue streams like trade finance and remittances from construction workers have weakened,” Aqib Mehboob, an analyst at Saudi Fransi Capital, said by phone. “There’s probably more provisioning to come.”

The price-to-book ratio for a stock index comprised of Saudi Arabia’s 12 local lenders has fallen 25 percent over the past 12 months to 1.0965 on Monday, with eight of its members trading below their asset value.

“Saudi bank valuations have fallen to the lowest since the financial crisis, yet even at these levels it is not attracting investors back in as they are still afraid of what may come next,” Muhammad Faisal Potrik, head of research at Riyad Capital, said by phone.

Economic Slowdown

In the United Arab Emirates, Dubai Islamic Bank said this week that profit dropped 9.9 percent to 876 million dirhams, missing analyst estimates of 896 million dirhams, while Mashreqbank’s earningsfell 25 percent to 415 million dirhams as impairments rose. National Bank of Abu Dhabi PJSC and First Gulf Bank PJSC, which are combining to create a banking national champion in Abu Dhabi, report earnings on Wednesday.

Not every lender is struggling. Al Rajhi Bank, Saudi Arabia’s second-largest by assets, reported a 17 percent rise in profit -- even as impairment charges increased -- because of higher fee and commission income. Still, analysts at Albilad Capital cut their profit forecasts for the bank over the next three years, citing slower deposit and economic growth.

The slowdown has come quickly to the region. Two years ago Gulf banks were reporting rising profits as economic growth in the region accelerated and companies repaid debts that were restructured during the financial crisis. Share sales and mergers and acquisitions boosted fee income and loan books. Since then deal activity has dried up, while lending has shifted to international banks.

The International Monetary Fund is forecasting economic growth for the six countries of the Gulf Cooperation Council will be 1.8 percent this year, down from 3.3 percent in 2015. Initial public offerings on Saudi Arabia’s stock exchange, the largest in the region, have fallen 46 percent to $274 million and no share sales have taken place in the U.A.E. or Qatar, according to data compiled by Bloomberg.

While syndicated loan volumes for GCC borrowers has risen 27 percent this year, only National Bank of Abu Dhabi is among the top 10 mandated lead arrangers, according to the data. Last year, there were three regional banks in the top 10.

Dubai-based investment bank Arqaam Capital also sees continued pain for the banks as they adjust to limited growth and rising bad loans.

“We see further headwinds from a slowdown in balance sheet growth, pressure on investment income and higher provisioning, partly offset by very tight cost management and higher asset yields as banks will start to adjust rates on loans and investments in the medium term,” Dubai-based Arqaam Capital said in a note to investors.

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