Provisions by most banks in Gulf oil producers surged in the second quarter of 2012 after a decline in the previous quarter, stifling their net profits achieved mainly from higher interest income, according to a Kuwaiti bank.

Four banks in the UAE, the second largest Arab economy with the biggest banking sector, were the only banks to record a decline in loan loss provisions in the second quarter, Global Investment House (GIH) said in a study.

The collective non-performing loan provisions made by the 22 Gulf Cooperation Council (GCC) banks covered by the study plunged by 46 per cent in the first quarter compared with the previous quarter and by around five percent compared with the first quarter of 2011, GIH said.

“Provisions expenses saw resurgence during the second quarter… collective provisions for the GCC banking coverage jumped 10 per cent YoY driven by Kuwait and Saudi Arabia. The UAE stood on the other end of the spectrum, as it was the only GCC country that witnessed a decline in provisions.”

The report showed the banks under coverage saw “stagnancy” in profit growth YoY in the second quarter of 2012, adding that gains made by the net interest income were offset by higher provisions and operating expenses.

Net interest income grew by six per cent YoY while provisions and operating expenses rose by 10 per cent and seven per cent YoY respectively.

“Adjusting for one-off gains made by Abu Dhabi Commercial Bank (ADCB) in the second quarter of 2011 on the sale of a Malaysian associate, and also for extraordinarily high provisions taken by the bank then, we believe that the profits of our coverage improved by five per cent YoY in the second quarter of 2012.”

The report showed the combined net interest income of covered banks grew by around six per cent YoY in the second quarter and two per cent QoQ.

It said growth rates were spread over a wide spectrum with Kuwait being on the lower end (one per cent YoY) and Qatar on the higher (17 per cent YoY).

“Balance sheet growth slowed down during the quarter and inched up by 0.4 per cent QoQ for the collective GCC banking sector. Balance sheet shrinkage recorded by UAE banks had a strong impact on the sector but the effects were largely diluted by strong asset growth witnessed by Qatar.”

The report covered banks from all GCC members, including the UAE’s largest banks—Emirates NBD, National Bank of Abu Dhabi, First Gulf Bank and ADCB.