GCC Banking: Remains resilient


Kuwait Financial Centre “Markaz” recently published the executive summary of its report on GCC Banking. In this report, Markaz analyzes the status of GCC banking in 2013 and expectations in 2014.

The majority of banks in the GCC region are domestically-owned, and consequently, there are high barriers to entry and restrictions on foreign banks. These barriers also limit the ability for cross-border consolidation. Foreign ownership in banks is severely restricted across the Gulf, from a low of 35% in Oman to 49% in Kuwait and Qatar.

GCC banking sector overall accounts for 94% of nominal GDP in 2013. In terms of corporate profits GCC banking profits is estimated to be 42% of total corporate profits in 1H13.

The GCC countries have highly developed banking regulations, given the long history of central bank activity. Saudi Arabian Monetary Authority is the oldest among GCC Central Banks and was established in 1952. Central Bank of Bahrain was created in year 2006. Other than regulating local and foreign banks, the role of central banks also extends to regulating other types of financial institutions like Insurance and Reinsurance Companies, Insurance Brokers, Actuaries Investment banks, Investment Companies etc.

The GCC countries are long-time adopters of Basel Accords; Saudi began implementing the accords in 1990, while wider adoption in the region began in the early 2000s, with Basel II adopted in Kuwait in 2005. Kuwait has announced aims to implement Basel III during the year while Saudi Arabia has begun implementing the new measures. Capital Adequacy Ratios, which provide banks with a buffer against shocks to the system, have been ramped up across the GCC, from around 8%-10% pre-crisis to a current limit of 12%.

Qatar National Bank (QNB) is estimated to occupy the top position in terms of loans, deposits and assets in 2013. QNB was the top bank on these parameters in 2012. Emirates NBD is estimated to occupy the top position in terms of revenue in 2013 and is likely to be followed by QNB.

Islamic Banking has been a hot-button topic in recent years, witnessing high levels of growth. At the same time, the industry has faced criticism for lack of standardization and non-adherence to ‘pure’ Islamic financing practices. Given the emphasis on tangible assets and business models, rather than creditworthiness, Islamic banking is seen as less speculative than its conventional counterpart. Given the head start that conventional banks have had, it’s no surprise that they account for roughly 80% of the regional banking sector assets. Anecdotal evidence suggests that Islamic Banking assets in the GCC account for roughly 28.70% of global Islamic bank assets which are well over $1500bn. The difficulty in surmising the actual size of Islamic financing assets in the GCC arises given that a good degree are within conventional banks, collated through Islamic windows. About 60% of the region’s balance sheet lies in this segment (Conventional Banks with Islamic operations) as well, with 63% of loans and 65% of Deposits.

Some of the challenges facing the GCC banking sector are the drop in lending and deteriorating asset quality since the global financial crisis, adoption of advanced IT innovations, continued regional and global expansion, shortage of skilled labor and large number of projects on hold in the GCC region which ultimately affects the demand for credit. 

Some banks in the GCC managed to make it through the crisis with their ratings unscathed, or were even upgraded to showcase their resiliency. Riyad Bank, Samba Financial Group and Bank Muscat all saw their ratings increase post-crisis.

After two consecutive years of declining bottom-line figures, the GCC banking sector resumed its trajectory of expanding profits in 2010/2011 and continued the same in 2012.The catalyst for this growth is declining provisions after the spikes witnessed in 2008/2009 as a result of the global financial crisis. Markaz estimates the provisioning to increase by 6.10% in 2013. However, the GCC banking sector is estimated to remain profitable at the end of 2013. Loans (at 13.61%) and deposits (at 13.26%) are estimated to grow in 2013 at almost the same rate as 2012.  Additionally, top line growth is expected in 2013 to be at 14.68% versus 7.15% in 2012. Interest income is expected to grow at 9.06% in 2013 versus 6.00% in 2012. Non –interest income is estimated to grow at 21.41% in 2013.

The debt issues which caused a spike in provisioning are by no means history; muted private demand and high NPLs remain sources of concern going forward.

The results of our regression analysis show that GCC banking will continue to do well in 2014. Overall profitability is forecast to grow at high single digits in 2014. Lending is forecast to increase by mid-single digit in 2014 for the GCC region, while deposits would increase at a rate slightly lower than 2013. Top line growth in 2014 is forecast to reduce significantly and would be in mid-single digit. Interest income is forecast to grow at a rate slightly higher than 2013 while non-interest income is forecast to increase only marginally.