GCC banking sector continues to boast strong balance sheet

GCC Banking sector continues to boast a strong balance sheet coupled with improving margins as seen from 2018 financial results. The 2018 numbers also show minimal impact from the decline in oil prices which continue to remain low as compared to pre-crisis levels, KAMCO Research noted in its latest “GCC Banking Sector Report”. QNB continued to be the biggest bank in the region with a share of 11 percent of total assets of the GCC banks as of the end of 2018 The report that analyzes financials reported by 66 listed banks in the GCC for 2018, said a number of factors have contributed to the 7 percent CAGR in total assets of listed banks in the GCC over the past five year. These include a robust project market more than $3trillion in projects planned or underway, government’s focus on developing the non-oil sector, low interest rates with central banks resisting passing on all the rate hikes by the US Fed and lastly the stable economic environment with real growth rates averaging at just over 2 percent over the past five years.

In terms of profitability, GCC listed banks have consistently reported higher margins over the past three years. Net interest margin has grown 10 bps each over the last three years to 3.1 percent for the aggregate GCC banking sector although loan-to-deposit ratio has declined over the last two years to reach 81.8 percent one of the lowest globally. Despite a decline in the loan-to-deposit ratio, net income grew by 13.2 percent during 2018 to reach $37bn. Higher bottom-line came as a result of 7.7 percent growth in net interest income while noninterest income grew by 2.4 percent. Operating expenses as a percentage of total bank revenue also declined by almost 70 bps during 2018, providing additional support to the bottom-line.

The GCC banking sector boasts strong balance sheet support as customer deposits continued to increase over more than a decade. Total balance sheet assets of the sector stood at $2.2trillion at the end of 2018 with earning assets reported at an average of 86 percent. The top 10 banks in the region accounted for 53 percent of the total assets for the sector in the GCC. QNB continued to be the biggest bank in the region with a total asset of $236.8bn or 11 percent of the sector as of the end of 2018 followed by FAB at 9.4 percent or $203bn.

Despite rising profitability, the optimal utilization of earning assets was a key issue with GCC banks as seen from the declining loan-to-deposit ratio over the past two years. In addition, with the economic downturn seen over the past few years led by the decline in oil prices, banks were finding it increasingly difficult to boost lending and overall revenues. Furthermore, with the next wave targeted at fintech, banks need to invest in adding capabilities which includes cutting costs by reducing physical presence as seen in the case of Mashreq Bank. Also, risk weighted exposure with the implementation of IFRS 9 puts further stress on the banking business. Some of the recent transactions in the banking sector included the recently announced merger of KFH and AUB to create the sixth largest bank in the GCC, Oman Arab Bank and Alizz Islamic Bank in Oman, Barwa Bank and International Bank of Qatar to form Lusail Bank and Saudi British Bank and Alawwal Bank in Saudi Arabia.

Both Islamic and conventional banks in the region have shown growth in assets over the years, although over the past two years, conventional banks have growth at a slightly faster pace as compared to Islamic banks. Nevertheless, the 5-year CAGR for Islamic banks was marginally better at 7.8 percent as compared to 6.9 percent for the conventional lenders in the GCC.

Going forward, KAMCO analysts foresee a number of positives for the GCC banking sector that help to mitigate key downside risks. Some of these risks include excessive exposure to the real estate sector. The real estate sector continues to face challenges, especially in the UAE, due to continued oversupply and the near term outlook for the sector shows continued downward pressure. In addition, governments continue to be the primary originator of key projects in the region. With the excessive dependence on oil revenues, the government may prioritize some sectors and shelve or delay the non-critical ones as seen in 2015 when oil prices reached multi-year lows. Moreover, the implementation of IFRS 9 is expected to affect the asset quality on an increasing scale over the next couple of years.

Source from: The Peninsula