Cairo – Decypha: The GCC banking sector has been experiencing fluctuations due to the oil price slump, which begun in mid-2014. The industry has been witnessing a slowdown in its growth rate ever since, with only an average rate of increase of 5.2%, as reported by Trade Arabia. Nevertheless, the IMF believes that the region’s banking sector has proven strong enough to outstand any oil price fluctuations.
The sector is showing high levels of resilience despite the drop in oil prices, the overall outlook is rather positive, AMEInfo quoted KPMG’s results report on GCC-listed banks.
The research covered about 90% of the listed banks in the GCC region, and there was a clear indication that the banks have been performing well over the past 12 months.
Omar Mahmood, Head of Financial Services for KPMG in the Middle East and South Asia told AMEInfo that GCC banks create efficiencies and are opting for innovative ways to stay ahead.
While the banking sectors witnessed the oil prices’ dilemma less than three years ago, another event took place the region that inflicted some other challenges.
Earlier in June, Saudi Arabia, Bahrain and the UAE, among several other countries decided to sever their diplomatic ties with Qatar on claims of funding extremists and terrorist organizations, inflicting pressures on Qatar’s banking sector.
The research covered about 90% of the listed banks in the GCC region, and there was a clear indication that the banks have been performing well over the past 12 months.
The Impact of Qatar Crisis
The Qatari banks had to deal with the difficulties they already have, including the financial demands of World Cup 2022, besides the blow they received from their neighbor countries’ abrupt decision to cut economic ties, according to Bloomberg.
Some banks in UAE, Saudi Arabia and Bahrain have cut exposure to Qatar. Some lenders have already withdrawn their deposits from Qatari banks and stopped trading bonds and Qatari currency, Bloomberg reported.
The broadening of financial sanction can have negative repercussions, as the leading Qatar Banks rely on foreign funding, which may lead to credit boom. However, only 4% of Qatar’s National Bank are from the boycotting countries, Arqaam Capital Ltd. analysts Jaap Meijer and Michael Malkoun said in a report.
Additionally, three of the biggest banks, Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc in the United Kingdom have stopped trading Qatari riyals, Arabian Business reported.
As for Qatar, its banking sector was already stretched prior to the crisis, the economist reported according to Qatar Central Bank. However, Qatar is one of the richest countries and has the financial power to protect its banks, according to Business Insider.
"International banks will be less knee-jerk than the local banks as they don't want to cut off their nose to spite their face," a compliance executive at a foreign bank told Reuters.
The UAE
The banking sector in the UAE is a pillar of its economy as it provided the basis of development.
The economic slowdown over the past two years that was caused by the drop in oil prices have resulted in an inevitable consolidation in the banking sector in the UAE, according to a report from the Statistics Centre Abu Dhabi (SCAD), AMEInfo reported.
The UAE banks weren’t having their best times in recent years as the governmental institutions withdrew funds to instead pump them into plugging the growing budget deficit.
However, and according a report on the UAE’s banking sector by Alvarez and Marsal, the banking sector in the UAE, despite the decrease in the profitability over the recent years, still sustains a better shape in comparison to the UAE’s global peers, the national reported.
The global consultancy further predicted in its report that there will be more signs of recovery in the sector.
The lowering in prices of oil had led to an increase in borrowing by the government in order to reduce the deficits in the budgets. However, it has alleviated demands for loans.
There are a plenty of reasons for banks’ shareholders to be optimistic as the banks are being run very wisely, Managing director of Alvarez and Marsal Saeeda Jaffar told the national
The banks in the UAE have significantly boosted their loan books and revenues in the first quarter of 2017, according to Khaleej Times. A survey conducted by the Central Bank showed that demands for personal loans and business credit have increased in the first quarter as well due to the higher oil prices.
The dominating theme of the first quarter is revenue-based due to the increased lending, Jaffar continued.
While the growth has slightly risen this year, banking sector analysts still believe that there will be challenges facing the sector. The banks will face further slowdown in the loan growth, gulf news reported. Another obstacle for the UAE is the uncertainty that is facing its national economy.
Kuwait
In March, Moody’s maintained its stable outlook for Kuwait’s banking systems.
Multiple projects are under execution and are set to create corporate lending opportunities for banks. He added that the group is expecting 6%-7% growth over the next 12-18 months, Assistant Vice President for Moody's Alexios Philippides said.
There are several challenges that are facing Kuwait’s banking sector and hindering its ability to grow, including Kuwait’s reliance on oil as a major driving force, according to a report by Arab Api.
The second challenge is that Kuwait’s public sector dominates the economic sphere in terms of ownership and management of the vast majority of activities.
“As a result of the over-dependence on oil and the public sectors, it was difficult to develop many profitable investment opportunities outside the limited scope of real estate, trade and stock market activities. This has translated into the concentration of bank lending into consumer loans, real estate, construction and trade finance at the expense of lending to the industrial sector,” the report added.
Qatar
Despite the low prices of oil, the banking sector in Qatar remained healthy with high capital ratios, according to an interview with the governor of Qatar’s Central bank.
Sheikh Abdullah Bin Saud Al Thani said that he is sure of the sector’s health and prospects. He said the Qatar Central Bank’s recently-published financial stability report highlighted that the Qatari banking sector remained one of the healthiest in the GCC region.
The banking sector in Qatar has seen a robust growth and will continue to see rapid growth. However, they continued that it has been faced with a difficult economic phase due to the low prices of oil and the regional political instability. But the country’s business friendly economic environment has helped ensure the banking and financial services sector has continued to thrive, and should continue to do so into the future, RFI Global Retail Banker said in a report.
Saudi Arabia: Earlier in March, Moody’s changed the outlook for Saudi Arabia’s banking industry from negative to stable, according to the National.
Despite the low prices of oil, the Saudi sector will continue to recover, supported by the government spending, Moody’s vice president Olivier Panis said
In March, Saudi banking sector’s profits upsurged by 16%, according to Analysts at Al-Rajhi, Arab news reported.
However, analysts believe that inflation will pick up during the second half of 2017.
Saudi Arabia banks are being faced with several challenges including low oil prices, rising cost of funds, and pressure on profitability, according to banking sector analysts as reported by Gulf News.
Oman
The statistics of the Central Bank of Oman have shown that there was an upswing in money supply part in the first quarter of 2017. It rose by 2% year-on-year with 2016, Observer reported.
The report continued that Moody’s announced in June that 34% of banking system deposits were made by the Omani government, saying that the higher oil prices are behind the improved national revenues.
However, there have been a number of challenges that faced Oman over recent years as well. These challenges include the new Islamic banks segments that have increased the competition levels. Along with the declining oil prices that constricted lending opportunities for some segments. The uncertainty surrounding the growth of regional economies, according to Oxford Business Group.
Bahrain
The overall assessment and outlook for Bahrain is fairing well, according to a report of listed banks from KPMG.
The challenging economic situation over the past 12 months has led to a drop in profits, Partner and head of Financial Serves of KPMG Jalil Al-Ali said ,Trade Arabia reported.
The Islamic International Rating Agency released a report saying that despite it being a relatively small economy, it has maintained its status as a financial hub in the GCC during the recent years. Late 2015, Moody’s changed the status of Bahrain’s banking system from negative to stable.
In 2016, analysts said that there are two key challenges that are facing the financial sector in Bahrain, the low prices of oils and the government’s weakened finances, according to propel consult,
Another challenging factor for Bahrain’s financial sector is that several foreign institutions have left to Dubai, Qatar, Saudi Arabia and the UAE, according to the Economist.
Future of Banks in GCC
In December 2016, Moody’s released report that included its expectations for the future of the banking sectors in the GCC countries over the next 12-18 months.
The operating conditions of the GCC banks will remain challenging. However, the stabilization of oil prices and the resilience of non-oil sectors have been showing will help alleviate the pressure on banks from the slow economic growth, economic and fiscal reforms and spending cuts, Vice president at Moody’s Olivier Panis said.
The asset quality is likely to remain solid in the GCC countries, and the rating agency forecasting non-performing loan ratios to stay the same as 3-4% in 2017. Despite the tightening liquidity in the region and the new problem in loans that resulted from the slowing economic activity, the banks in the GCC still maintain high single borrower and sector concentrations, Panis continued.
Moody’s believes that the profitability will remain sound despite the fact that it may decline slightly due to the slowing credit growth. It further expects that the GCC governments’ willingness to support banks in case of need remains high, even if they are facing pressures in the fiscal capacity that may result in their selectivity to the banks.
On the other hand, Alix partners said in a report that the future of the GCC banks is like “diamonds in the rough” and needs to be polished.
In conclusion, for he GCC banks need to start realizing their potential and addressing the challenges the global financial systems are facing. They should also take advantage of the free capital offered by the natural resources in the gulf region.
Multiple strategic moves can be taken by GCC banks, including productivity enhancement, integrated health management, active real estate and from investment banking to “digital wallet” banking.
Relevant policy makers and top managers can help solve the issues that challenged the GCC banks in the past and help them start their “Diamond Age”.
By Toqa Ezzeldin
