Local banks in the GCC have largely held back from cutting staff numbers, despite declining revenues over the last year, and there are reasons to believe this trend could continue despite “anemic” deposit and credit growth during the first half of 2010.

As we’ve surmised previously, increasing provisions for bad loan defaults and shrinking deposits at a retail level within the GCC banking sector have made a case for paring back headcount within the institutions – something local firms have been reluctant to do.

But the latest IMF report into the GCC economic outlook suggests that the decline in profitability within the banking sector – despite continuing into the second quarter – is still a comparatively short-term phenomenon.

The IMF report points to sluggish levels of credit growth to due increased risk aversion, limited success in attracting private sector deposits and continued reliance on public sector support. Only Qatar and Saudi have shown “modest recovery” in bank credit, it says.

Surely, in such an environment, it would be time to start sharpening the axe? Well, not necessarily – while international banks are quick to cut staff when profits stall, those in the GCC have so-far been reluctant to make significant redundancies despite the souring scenario.

If they haven’t cut during the peak of the crisis in 2009, it’s unlikely that they will begin to do so now.

The IMF argues that the GCC financial system went into the global crisis “from a position of strength” with high capital adequacy and modest levels of non-performing loans. Banks’ capital buffers remain high, it says, through either public (in the UAE and Qatar) or private (in Kuwait and Saudi) capital injections.

“Data for Q1 2010 indicate only a small year-on-year decline in profitability (4%) and a more than doubling of profits over Q4 2009,” it reports.

The financial sector’s problems could affect growth in the short term, it adds, but “they remain manageable and should not undermine long term prospects.”