World Economy

Bad Debts: (P)GCC’s New Normal

Bad Debts: (P)GCC’s New Normal Bad Debts: (P)GCC’s New Normal

More than two-thirds of Persian Gulf Arab banks reported an increase in unpaid loans in the first three months of the year and more defaults are likely as oil-dependent governments slash spending to adjust to lower crude prices.

After several years in which banks' profits jumped thanks to the Persian Gulf Cooperation Council (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) petrodollar boom, the oil markets' two-year malaise is taking its toll. New global accounting standards from 2018 will make lending even harder, Reuters reported.

"The days of double-digit profits and expansion plans are gone," said one United Arab Emirates-based banker. "Now, it's all about single-digit growth and controlling costs as bad loans are going to keep getting higher. It's the new normal."

Two of the region's largest banks show how tough things have become.

National Commercial Bank, Saudi Arabia's largest bank by assets and with close links to the government, put aside 58.8% more money to cover bad loans during the quarter, analysts estimate, partly due to delays in government payments to its customers.

One of the most visible signs of the slowdown is the King Abdullah financial district in Riyadh, where gleaming tower blocks are still unfinished a year after they were supposed to be completed.

National Bank of Abu Dhabi, Abu Dhabi's largest bank by assets, reported 73.3% more defaulted loans over the same period; small and medium-sized businesses are struggling as well as larger companies such as Al Jaber Group, with interests spanning construction and retail to aviation.

Many indebted small business owners have fled abroad. Banks lost around $1.4 billion in the year to November this way, a senior banking official has said, although the head of the UAE banking federation said this week more were now renegotiating.

Out of 26 regional banks, 69% reported a rise in the percentage of non-performing loans and analysts and bankers expect that to climb further due to lower government and consumer spending.

"Normal Cycle"

Abu Dhabi's government cut spending by 20% in 2015, according to estimates by ratings agency Fitch, while in Saudi Arabia, cash withdrawals were down 8% in March compared to a year ago, official data shows.

Bankers cited cuts in subsidies and allowances and the one-off boost last year from a two month salary bonus for employees.

"There's no question consumer disposable income will erode for a period of time," said one senior banker. "There are pressures from bad debt. There's nothing out of the normal cycle. But it all adds up to pressure on the system."

Standard & Poor's expects credit losses and non-performing loans for the banks it rates in Saudi Arabia to rise to 2 to 3% of total loans over the next 24 months, up from around 1% now. That is still below the roughly 4.5% level reached for Persian Gulf Arab banks in the wake of the Dubai property crash in 2009.

Job losses have also hurt banks. Energy companies in Abu Dhabi and Qatar have cut jobs and Saudi Binladin Group, close to the ruling regime, is cutting around 70,000 jobs, about a third of its workforce.

In a bid to boost profitability, some banks, including Abu Dhabi's First Gulf Bank, National Bank of Ras Al Khaimah and units of Emirates NBD have already shed staff.

Many big state projects have also stalled, including the latest stage of Etihad Rail, the state-backed firm building a railway network in the United Arab Emirates.


Capital adequacy levels of Persian Gulf Arab banks stood at around 18% in the region last year, higher than the level required under Basel III of 8%.

But with a significant chunk of the region's debt held by banks, bankers fear that any diminishing in the creditworthiness of borrowers will affect their balance sheets.

Oil's slide has led to credit rating downgrades for some governments and companies with close state links, including banks. Bahrain, vulnerable because of its slim oil surpluses, is now rated junk by both S&P and Moody's.