Markaz: GCC Leverage Risk-How Real Is It?

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Markaz: GCC Leverage Risk-How Real Is It? 05 - Nov - 2006

Markaz has recently published a report examining the risks behind the increased exposure of the GCC financial system to the stock market. The report observes that while bank lending has increased proportionally to economic growth, the share of personal/consumer loans has gone up significantly leading to the risk perception. While the increase has been significant, they are not alarming when benchmarked with other leading emerging markets. Increasing liquidity improved the bank credit to GDP ratio to 48% from 35% during the last 5 years while personal loans to GDP ratio has increased from 8% to 18% during the same period. First half 06 trend has already surpassed full year 2005 trend for bank credit and consumer loans in spite of stock market correction. The report considers four key variables: Size, Asset Intermediation, Cross border activity and Capital market representation. The role played by the banking/financial sector in terms of asset intermediation and cross border activity has increased in spite of size remaining stagnant (as a percentage of GDP). Asset prices (capital market representation) seem to be the main beneficiary of this increased financial sector role. Sharp correction in the capital market during the 1H 06, has pushed down the size and asset intermediation levels, but not proportionately. Saudi Arabia: Bank Credit growth in Saudi Arabia has significantly outpaced economic growth during the last 12.5 years. The components of credit growth have also undergone change. “Misc” segment tops the share. Consumer loans have grown at the rate of 51% p.a during the past 7 years and currently represent about 16% of GDP Kuwait: Bank credit growth in Kuwait outpaced economic growth literally 2:1. Personal facilities represented nearly 22% of GDP while real estate represented 11% of GDP by the end of 2005, implying dominance of personal facilities. While the share of personal facilities to GDP remained in check (from 17% in 1999 to 18% in 2006), the components constituting personal facilities changed dramatically. While installment loans had no share in 1999, it commanded nearly half of personal facilities by end of 2005. The share of purchase of securities increased from 14% in 1999 to 24% by 2005. UAE: UAE represents the highest bank credit/GDP ratio among all GCC countries at 73%. Personal loans constitute the largest share at 24%. It registered a growth of 41% p.a during years 2000-2006, thereby increasing its share from 12% in year 2000 to 24% by 1q-06. Qatar: Unlike Saudi Arabia or Kuwait, Economic growth outpaced bank credit growth in Qatar. Personal loans constitute the largest share at 24% while real estate recorded the fastest growth of 75% p.a. In absolute terms, personal loans increased from QR 7.9 billion in 1999 to nearly QR 30 b by 1H 06. Oman: Economic growth outpaced bank credit growth progressively reducing its share to GDP from 37% in 1997 to 30% in 2006 (June).. Personal loans constitute the largest share at 39%, growing at 9% p.a . Bahrain: Bank credit growth matched economic growth. Personal loans constituted the largest share at 45%, with trade being a distant second at 16%. The report also analyses the linkage between bank credit growth and interest rate margin. Kuwait, UAE and Qatar seem to converge to similar levels with Oman on the lower side and Bahrain on the higher side. According to the report, UAE appears highly vulnerable to a leverage threat given the high bank credit share to the economy and the extent of personal loan exposure. Vulnerability assessment for Kuwait, Qatar & Bahrain was ranked medium while that of Saudi Arabia and Oman assessed low. The report also observes that GCC banks have risk-averse portfolios backed by more than adequate capital adequacy ratios. Stress tests conducted by central banks points to adequate resilience. Kuwait Financial Centre 'Markaz', with total assets under management of over $4.35 billion as of June 30, 2006, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd. -Ends- M.R. Raghu, CFA Head of Research, Markaz Photo Caption: Manaf Alhajeri, General Manager of Kuwait Financial Centre “Markaz”