(MENAFN- Khaleej Times) Lenders seen finding ways to create efficiencies, innovative methods to stay relevant to customers Banks in the GCC are in a stronger position to weather the current economic challenges, underscored by ongoing government support and infrastructure investments, which will help maintain further stability in the sector, banking analysts said.
"The overall long-term outlook for the GCC banking sector remains relatively positive even though considerable challenges are expected to prevail in the coming months," analysts at KPMG said in a GCC-wide banking study, which states that banks in the region have been resilient despite margin pressures, increased impairment charges and higher funding costs.
Key themes that are expected to govern the banking sector include the likely implementation of value added tax and IFRS 9 in January 2018, digitisation, cyber-security and improved cost and operational efficiencies, and higher capital and fund raising activity, said the study.
Omar Mahmood, head of financial services for KPMG in the Middle East and South Asia, said in what has been a challenging economic year globally, most of the challenges specific to banking have remained constant over the past 12 months, and the drop in profits reflects this.
"However, we are increasingly seeing banks looking to create efficiencies and find innovative ways to stay relevant to customers. One example of this is the gradual shift from banks looking to win the 'battle of the balance sheet', towards a focus on the 'battle of the customer'. A large number of regional banks are constantly looking at ways to improve," he added.
"Overall, we feel that banks are in a stronger position to weather the current economic challenges, underscored by ongoing government support and infrastructure investments, which will help maintain further stability in the sector," Mahmood said in the banking study that analyses results of 56 of the region's public-listed banks, covering over 90 per cent of listed banking assets.
According to a recent study by Boston Consulting Group, the overall revenue growth of GCC banks are expected to remain in low single digits next year compared to historically high double-digit growth. The study found that lower oil prices are adversely impacting the banking industry. In 2016, GCC banks' revenues grew by 5.2 per cent, down about two percentage points from 2015, after a drop of three percentage points from 2014. Revenue growth is expected to remain in single digits of seven to eight per cent during the current year.
U Capital said in a banking sector outlook report that the GCC banking sector, which clocked in a 6.4 per cent year on year credit growth in 2016, would continue to pursue a cautious stance on loan book growth and will only expand it opportunistically as focus remains on preserving asset quality and maintaining profitability, a banking outlook report said. The KPMG study, which is published under the theme 'Navigating through change', highlighted that net profit succumbed to margin pressures and higher impairments costs and witnessed a year on year decline for the first time in recent years. The credit quality of many banks also deteriorated with overall impairment charges increasing by approximately 25 per cent from 2015.
"Despite these challenges, asset growth stood at a robust 6.5 per cent on average across the region, driven by increased lending to government and related entities," it said.
Mirroring the increased capital raising activity during the year, overall capital adequacy and liquidity ratios on the banks' balance sheets increased in 2016, helping banks grow and remain above minimum capital adequacy requirements. This figure could reach 18, said the study.
In the UAE, decelerating GDP growth coupled with rising impairments and non-performing loans have pressured banks.
"Net impairment charges on loans and advances increased 28 per cent to $3.7billion in 2016. Higher impairments along with increased cost of funds lowered profits by 5.8 per cent year on year which also led to a drop in returns on both assets and equity. However, the capital adequacy ratio stood at a healthy 18.3 per cent. With threats of cyber security and regulatory changes looming, and the likely introduction of VAT in 2018, several structural reforms are expected," it said.
In Bahrain, financial services recorded overall growth from 1.7 per cent in 2015 to 7.4 per cent in the third quarter of 2016 but impaired loans had to be checked because of manufacturing and mining sectors.
Kuwaiti banks tapped the debt capital markets to raise tier 1 and tier 2 Basel III compliant funds exceeding $1billion that significantly improved the capital adequacy ratios.
In Oman, as of December 31 2016, outstanding credit from banks totaled $57.2 billion, a rise of over 10 per cent over a year ago. Total deposits during the year grew over 5 per cent to $52.8billion.
In Qatar, other than the impact of a significant acquisition by the largest lender in Turkey, asset growth has been minimal.
In Saudi Arabia, liquidity pressures have eased owing to the launch of Vision 2030 and the subsequent record bond issuance of $17.5 billion; release of $28 billion by the government to contractors and stabilising oil prices.
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Issac John Associate Business Editor of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.
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