Bank lending to companies at lowest for decade in Middle East

The market for corporate lending in the Middle East virtually collapsed in the first half of this year, according to new data from the information business Thomson Reuters.

Figures show that syndicated lending reached just US$187 million (Dh686m) in the first six months of the year, down from $10.2 billion in the first half of last year, making it the slowest period in more than a decade.

The crisis in the euro zone, fears over global economic recovery, and pressures on banks' balance sheets are among the factors behind the dramatic decline, experts believe.

Virtually the only big corporate loan negotiated in the period was the $175m refinancing by the Egyptian private-equity group Citadel Capital, arranged by Citibank, Thomson Reuters analysis of investment-banking returns in the Middle East shows.

The decline in corporate lending this year makes a stark comparison with the boom days of 2007, when companies borrowed about $144bn, and in 2008, when the figure reached $126bn. Last year, the total was $16bn.

Companies instead are increasingly turning to the debt markets for funding.

The figures show that activity in the debt capital markets grew to nearly $17bn in the first half of this year, up 51 per cent compared with last year's first half.

Islamic debt issuance amounted to $14.5bn, a 25 per cent increase.

Although the decline in traditional bank borrowing presents new problems for stretched corporations, especially the big family-owned companies typical of the GCC region, and for the investment banks that arrange syndicated loans, it reinforces the regional banking sector's reputation as prudent lenders.

A recent study by the ratings agency Standard & Poor's concluded that the regions' banks were likely to experience "steady recovery" from the 2008 crisis this year and next, despite the pressures from the euro-zone difficulties.

"We believe the trend of declining loan loss provisions will continue for most of the banks in the Gulf Cooperation Council, resulting in further recovery in reported net profits despite adverse conditions in the euro zone and international banking markets," said the S&P credit analyst Timucin Engin. "Since the start of the global financial crisis in 2008 and despite slower balance-sheet growth, most GCC banks have maintained healthy earnings generation before provisioning.

"Even though pockets of risk persist, asset quality continues to improve, and as a result banks do not need to set aside as many provisions to cover their loan losses. This trend of better asset quality and lower loan loss provisions is fuelling the improvement in earnings at most Gulf banks," he said.

S&P does not expect the euro-zone turmoil to have a big direct impact on GCC banks because their net funding dependence on European banks, and external funding in general, is largely limited and manageable, the ratings agency said.

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