The GCC banking sector has emerged as a more positive sector, despite its ties to the real estate and investment sectors across the GCC. With the exception of Oman, the banking industry recovered from its two-year losing streak, aided by governments’ full support and a proper liquidity infusion to various financial entities.

In 2010, banking stocks continued to announce healthy quarter-by-quarter earnings; but the boom in earnings was mainly a result of lower provisions, rather than any healthy growth in top-line areas, as the sector saw weak banking business aspects. Loan books were almost stagnant, while customer deposits and cash in hands surged together, mainly on the back of weak credit growth.

Total GCC banking profit jumped up by 13.8 percent to reach $16.85bn, from $14.80bn a year ago. Key performance parameters like RoE and RoA have also been strong: average return on equity stood at 11.74 percent, compared to 11.31 percent in 2009, and return on assets stood at 1.62 percent, against 1.52 percent in 2009.

Inflating profit pushed up total shareholders’ equity by 9.7 percent, to reach $143.58bn by 2010. Total assets grew by around seven percent ($66.28bn): Qatar’s banking sector emerged as the leader, reporting a surge of 20 percent ($21.60bn), whereas Dubai reported a mere two percent growth ($2.95bn). Among several other weak factors in Dubai, loans and advances reported a drop of 1.1 percent (down by $6.57bn). Total GCC cash and equivalents soared by 14.7 percent ($14bn), thus cementing a slowdown in lending.

Superior to market indices
Of the seven regional markets, five banking indices ended the year on the green turf, while Oman and Dubai declined by 11.25 percent and 3.06 percent respectively during the year. Stable lending rates, a curb on poor assets, specific attention towards quality of new credits and declining provisions, along with proper debt restructuring procedure for banks in the troublesome investments and real estate sector, marked banking as an attractive investment avenue for 2010. 

Kuwait’s banking index outshone all others with robust growth of 42.50 percent. Qatar ended a bullish journey with a hefty gain of 37.18 percent, followed by Bahrain, Saudi Arabia and Abu Dhabi. Overall, the GCC banking index reported a surge of 13.89 percent, whereas the GCC market index performed much lower at 3.72 percent.

Total assets of GCC bankers reached $1.04trn, adding $66.28bn, mainly sourced through ballooning customer deposits and poor growth in credit take-off in the real estate and construction sector, which were tagged as ‘limelight borrowers’ in past years. Guided by this, total cash across the GCC reached $109.22bn, up 14.7 percent year-on-year, despite the fact that many lenders used rising cash to pay off other liabilities. Also, bolstering cash increased its share in total assets to 10.5 percent, from 9.8 percent in 2009, as investors’ greater risk aversion forced them to move towards deposits. The total GCC loan book grew by just 4.2 percent, of which advances to deposits reached 0.95 percent from 0.99 percent, and its share in total assets also dropped to 61.5 percent from 63.0 percent in 2009.

On the income statement side, net interest margins (NIMs) remained almost unchanged, at an average of 3.3 percent. Abu Dhabi, Oman and Qatar emerged as the winners: their NIMs were fuelled by growth in interest-earning assets amid aggressive credit expansion due to favourable macroeconomics.

Despite flat NIMs, net profit was buoyed by lower provisions, along with improving non-core income and cost-cutting measures. Saudi Arabia took the greatest share of total GCC profit (34.8 percent), while Kuwait extended its share to 12.10 percent from 8.54 percent a year ago (see opposite).

On the cost-to-income front, the average GCC ratio remained steady at 0.34, while all banks maintained their respective ratios except for Oman (see below). Qatar continues to outshine its peers by having the lowest ratio, whereas Bahrain scored lowest on the efficiency scale.

The key to success
After a good 2010, 2011 will pose challenges for growing revenue, amid regional instability and limited investment venues; however, the sector can benefit from the evolution of market-driven services.
GCC banks are facing strong headwinds on local as well as global fronts, which have made them more risk-averse. In addition, their exposure to real estate, trading and stock market activities is further hurting them in terms of asset quality, as banks are still struggling to find new avenues to sustain their growth momentum. ‘Limited growth concern’ is an idea evidenced by various economic and political issues, appearing since the beginning of 2010.

Although piled cash surplus (courtesy of high oil and gas prices) in the last few years has provided much comfort to GCC governments to continue their planned projects, the GCC economies are imbalanced by having a closed structure on the front of growth and exposure. These are heavily dependent on oil and gas, which makes them quite vulnerable  to unhealthy developments in the global markets (as in the 2008 crisis), where oil prices reached a level of $30 from an all-time high of $147 within a few months.

Adding fuel, most of the businesses are still running under the roles of government and big family conglomerates, which in turn creates another puzzle for banks, as these institutions have concentrated borrowers with large borrowings. In the end, lack of diversification makes all banks vulnerable to political, economic and other global shocks.

Challenges ahead
Banks are in a transitional phase and facing five major challenges on the performance side. These are: business strength, growth, profitability, credit quality and efficiency. In the current and projected time frame, each lender in the GCC must evaluate itself and make peer comparisons based on these major criteria.

Business strength, in general, is reflected by strong banks, which is again a clear image of a strong economy. Depositors’ faith in their banks to repay (and vice-versa) is the foundation of the banking business. The ability of a bank to survive any financial turbulence is the test of this foundation. Though none of the GCC banks were bankrupted in the crisis, the continuous news stories are naturally frightening investors.

Growth is mainly achieved if efforts are directed in the right direction. Even the expansion of many banks across the MENA region brought a frightening prospect when the unrest spread in the fast-emerging markets of Egypt, Tunisia and other GCC countries, which ultimately cost banks dearly. However, this should not be a sole reason to restrict expansion, as diversification of business will remain a key essence of success for the GCC banks.

Maintaining profitability is the third but toughest task for lenders: any halt of infrastructure projects by governments or declining workforces (by job-cutting processes) will certainly impact negatively on the profitability of banks. To sustain good economic momentum, governments must initiate new projects so that lenders can lend; and intensify their efforts to restore old jobs, as well as adopt open business policies to create new ones. This in turn will help banks reinforce their business and maintain profitability for its shareholders.
Credit quality has become a focal point in post-restructuring debt and higher exposure to sensitive sectors in the economy. To overcome this daunting task, collective efforts should be put in by banks towards those impacted businesses by restructuring loans.

Under the circumstances where banks are feeling the pinch of low interest margins and declining income, it is quite obvious that to maintain their efficiency, they may go for cost-cutting measurements at various levels. However, it is believed that expanding branch networks into promising and untouched areas will help banks overcome this dilemma.

The long hard road
In short, the outlook for the sector is quite mixed, with several positive aspects hovering alongside multiple concerns. It is well accepted that hefty provisioning for NPLs have peaked, as 2011 earnings for the first and second quarter are quite encouraging, but slower growth in lending may continue amid cautious approaches. In addition, the long-term tilt towards energy exports and fewer business expansions outside the region, combined with sluggish recovery of real estate and construction, will continue to limit the GCC banks’ credit growth in coming years. The sector is not going to witness another period of ‘super growth’ any time soon.