Gulf banks’ long-term outlook remains positive

Muscat: Banks in the region fared well in 2015 and the outlook remains relatively positive given the expectation of continued government support for the sector and committed infrastructure investment, according to a KPMG report.
Despite the impact of margin compression caused by an increase in the cost of funds and greater competition for assets, both profitability and assets rose across the region by 6.8 per cent and 6.3 per cent respectively on simple average, said KPMG, a global network of professional firms providing audit, tax and advisory services.
KPMG’s first GCC listed bank results report analyses the published financial statements of 56 leading listed commercial banks across Oman, Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates.
“The banking sector in the region has moved a long way from the days of excess capital and liquidity. Our report reveals that the sector is no longer growing at double-digit growth rates,” said Paul Callaghan, head of Financial Services for KPMG in Oman.
“Banks are experiencing new challenges as a result of the current economic environment, greater regulatory oversight, supervision and stiffer competition. However the sector is still growing, although at a slower pace than previous years,” he added.
The continued rise in profitability and assets is largely due to the careful planning and the cautious approach adopted by banks, the study says.
The report suggests that 2017 is likely to see further capital and fundraising activity to support growth and to manage Basel III capital and liquidity requirements, particularly given that capital adequacy and liquidity levels fell in 2015 compared to the previous year.
Increasing regulation, despite creating additional pressure on banks, is having a positive impact on the sector – a trend which is expected to continue in the long-term. Basel III regulations, which are being adopted across the Gulf Cooperation Council (GCC), will continue to improve the sector's resilience against financial and economic stress, improve risk management and governance and strengthen banks' transparency, the study said.
The report also suggests that consolidation in the form of mergers and/or reorganisations could possibly take place in the near future as a result of stiff competition and increasing pressures on costs.
Net impairment charges have declined year on year by an average of 9.2 percent, reflecting the more cautious approach to lending adopted by banks in previous years. This trend may not continue due to a lag from the impact of the oil price decline on the wider economy, and with the implementation of IFRS 9, the new International Financial Reporting Standard, which will prescribe a completely new way of calculating credit losses which are likely to drive up impairment charges.
It is clear that the sector is looking for ways to mitigate current financial pressures as cost-to-income ratios have reduced by 7.4 percent on average since 2014. Paul continued “the reduction in cost-to income-ratios is backed up by an increase in banks looking to acquire consultancy services on cost-reduction, operational efficiency, digitalisation and other ways to improve profitability. This early action will help to bolster bank’s resilience moving forward.”
Paul added that most banks are being forced to adapt to the challenging environment. “we are seeing banks compete more aggressively, focusing more on efficiencies, and seeking innovative ways to grow and deliver positive results whilst managing shareholder expectations. We firmly believe that some of the fundamental changes we are witnessing, whether it be increasing regulatory scrutiny or greater efficiency will help the financial services industry and provide for greater stability in the long-term”.
The report titled “GCC Listed Bank Results: A new paradigm”, analyses the results of selected listed banks in the Kingdom of Bahrain, the State of Kuwait, the Sultanate of Oman, the Kingdom of Saudi Arabia, the State of Qatar and the United Arab Emirates. It summarizes bank’s results against selected key performance indicators for the year ending 31 December 2015 and compares these with the same information for the year ending 31 December 2014.