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First with Financial Comment from Arabia

GCC bank write-offs up 40%, how much more to come?

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Banks across the Gulf Cooperation Council nations will make total provisions of $9.4 billion against their 2009 accounts, a 40 per cent increase on the year before, according to a new study by the Kuwait Financial Centre.

This is a five-fold surge in total write-offs of just $1.8 billion in 2007. For 2008 the GCC banks took a more cautious view and made provisions of $6.7 billion.

2008 catastrophe

The Kuwait Finance Centre study says 2008 was a ‘catastrophe in terms of the sheer wealth destruction’ following the sub-prime financial crisis. For the GCC the focus was on the Dubai real estate crash, the stock market crashes and financial problems within Kuwaiti investment institutions.

The impact of the 2008 surge in write-offs was felt across the board in the Gulf in a stagnation of bank lending and a hoarding of cash to repair balance sheets. The study estimates that GCC bank loans will show four per cent growth in 2009, far below their historic average of 29 per cent from 2003-8.

For 2010 the Kuwait Finance Centre forecasts an eight per cent growth in total loans in the region with ‘Saudi Arabia and the UAE to be a drag on overall GCC loans’ growth’.

But such forecasts are hard to make with any degree of accuracy as they depend on very big unknowns such as what lies ahead for the global economy in 2010. This relatively optimistic view is an extrapolation of recent very modest growth trends into a full-blown recovery.

W-shaped recession

If global growth is more hesitant, or if the world experiences a double-dip recession with another down leg in the second half then the picture for bank lending would also dim considerably, and another round of big provisions be inevitable.

Then the question would be whether provisions to date are anything like big enough to reflect the true value of bank loan books in a protracted crisis with asset prices under more pressure.

However, the fact that banks are recognizing bad debts and writing them down is healthy for the banking sector and a sign of best practice. Eventually the banks may even over do it and be forced to write back some loans, but that could still be years away.

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Written by Peter Cooper

January 13, 2010 at 8:44 am

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