Middle East: No more easy money in the Gulf

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By:
Dominic O’Neill
Published on:

Big losses, growing provisions, slowing profit growth: money is no longer easy in the Gulf, as banks’ third-quarter results brutally showed.

Worst hit has been Kuwait’s Gulf Bank, which in mid-November announced a $1.4 billion loss on investments. The source was sales of foreign exchange derivatives to companies that stopped honouring their obligations. But analysts say the dollar’s appreciation has probably caused similar losses at other Gulf financial institutions.

"Perhaps Gulf Bank was more aggressive in providing foreign exchange derivatives. But similar instruments were sold by other banks in the region," says Mardig Haladijian, financial institutions general manager at Moody’s Investors Service.

In Bahrain, three firms announced losses of about $200 million each last month. Investcorp, the region’s biggest independent private equity company, took a $200 million mark-to-market loss, thanks to holdings of funds of hedge funds. Gulf International Bank had to write down $284 million from its third-quarter results. CFO Stephen Williams tells Euromoney it was written down against bonds issued by Lehman Brothers and other distressed institutions in the west. It was also attributable to the bank’s one remaining structured investment vehicle.

"This SIV had longer-term funding than the ones we had previously provisioned against but it couldn’t withstand the collapse of Lehman Brothers and the knock-on effect of that," says Williams.

Bahrain’s Arab Banking Corp also lost money in the third quarter thanks to a provision of around $200 million. It says it will now focus more on retail banking in the Levant, and in North Africa – a region where banking systems’ extreme insularity has been a shelter.

In other Gulf economies, liquidity remains restricted. Three-month inter-bank rates in the UAE hit a six-month high at the end of October, double the rate in April. The UAE was hit by September’s exodus of global funds, as much as $70 billion according to some estimates, retreating after betting on a revaluation or removal of the dirham peg to the dollar. But this speculative exodus has also affected Saudi Arabia. Both Saudi Arabia and the UAE have seen deposits struggle to keep up with lending this year.

"On average, Saudi banks breached the regulator’s 85% loan-to-deposit ratio guideline in April. But deposit growth is easing off, and loan-to-deposit ratios have continued to increase," says Howard Handy, head economist at Saudi bank Samba. Abu Dhabi Commercial Bank announced a provision of $57 million in the third quarter, partly on the expectation of rising non-performing loan ratios. National Bank of Abu Dhabi marked down its investment-grade portfolio by $16 million.

Property prices have begun to fall in the UAE, most notably in Dubai. Many Gulf banks also have large direct and indirect exposure to local equity markets, and these are all down at least a third since January. Saudi Arabia, the biggest equity market, has dropped 60%.

Dubai investment bank Shuaa this month blamed a $100 million loss in the first half of the year on mark-to-market valuations of global investments. But it said delayed capital markets transactions had also caused revenue to decline.