HSBC's lending in the Middle East declined during the first quarter of the year, signalling poor growth prospects for the wider economy.
The biggest international bank operating in the region shrank its total loan book, to individuals and companies, by 0.8 per cent to US$27.3 billion (Dh100.27bn) in the first quarter.
The Middle East was the only region where the bank experienced a shrinkage in its lending, as it boosted credit lines to Asian markets and increased its lending to individuals in Europe.
Worldwide, HSBC's loan book rose by 2 per cent to $978.8bn. HSBC cited a "low level of demand for corporate credit" in the Middle East as it reported lending of $20.7bn to companies in the first quarter, a 2 per cent fall from the same period last year.
European banks have withdrawn lending lines to the region and reduced staff numbers as they are required to keep more money in reserve under new rules known as Basel III. Many locally owned UAE lenders have also cut credit lines and sold loan books after the financial crisis sapped liquidity and led to huge provisioning for bad debts.
"Our view has been that this is going to carry on for some time," said Said Hirsh, a Middle East economist at Capital Economics.
"It's very difficult to see any kind of credit growth returning any time soon," he said. "There's still a lot of cleaning to do of banks' balance sheets."
HSBC's charges on bad debts in the Middle East almost tripled to $111 million in the first quarter, from $38m in the same period a year ago, which the bank attributed to defaulting borrowers in the UAE.
Local banks have complained that new Central Bank regulations capping the amount that they can lend to a single company will stymie their efforts to provide credit, with lenders including National Bank of Abu Dhabi and Emirates NBD lobbying for a softening of the new rules.
The new limits, due to come into effect on September 30, have yet to be reflected in banks' balance sheets, Mr Hirsh said.
HSBC embarked on a cost-cutting programme in the region last year, resulting in two rounds of employee layoffs and the closure of retail banking operations in Kuwait and the bank's retail brokerage in the UAE. The bank also spun off its regional private-equity business.
However, beginning near the end of March, HSBC has bought two of the region's oldest banking brands.
It acquired the onshore banking assets of Lloyds TSB Middle East at the end of March, reducing Lloyds's regional presence of more than 30 years to little more than a private banking branch. Last month, HSBC Oman announced a merger with Oman International Bank.
HSBC generated an underlying pre-tax profit of $6.7bn in the first quarter at a group level, an increase of 25.1 per cent compared with the corresponding period last year. The profit beat analysts' estimates as the bank benefited from booming growth in the Asia-Pacific region.
"Markets remain volatile, with high levels of debt and regulatory and political uncertainty in developed economies, contrasting with an encouraging outlook in faster-growing markets," said Stuart Gulliver, HSBC's group chief executive. "I'm shifting the entire focus so the emerging-market business predominates."
In the Middle East, HSBC reported a first-quarter pre-tax profitof $332 million, 0.9 per cent less than in the same period last year.
HSBC's investment banking division generated most of the group's earnings, accounting for $3.07bn of its pre-tax profit. The bank reported a loss of $997m in Europe, after it set aside $468m to cover charges arising from the mis-selling of payment protection insurance in the United Kingdom.
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