GCC banks 'resilient' despite challenging market

KPMG says banks coping well amid era of higher impairment charges, costs and increased margin pressures

The Gulf's banking system remains resilient despite margin pressures, increased impairment charges and higher funding costs, according to KPMG, the global audit, tax and advisory firm. 

Its report analyses the published annual earnings of 56 listed commercial banks across six GCC nations, covering over 90 percent of the region’s listed banking assets.

The report highlighted that net profit succumbed to margin pressures and higher impairments costs and witnessed a annual decline for the first time in recent years.

The credit quality of many banks also deteriorated with overall impairment charges increasing by approximately 25 percent from 2015.

However, it added that despite these challenges, asset growth stood at a robust 6.5 percent on average across the region, driven by increased lending to government and related entities.

KPMG said overall long-term outlook for the GCC banking sector remains "relatively positive". Key themes that are expected to govern the sector include the likely implementation of VAT, digitisation, cybersecurity, and improved cost and operational efficiencies, it added.

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.

“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.”

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 per cent in some GCC countries by 2018, well over the eight percent requirement under Basel III, KPMG added.

The report said financial services in Bahrain recorded overall growth from 1.7 percent 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.

Since the third quarter of 2016, liquidity pressures in Saudi Arabia have eased owing to the launch of Vision 2030 and the subsequent record bond issuance of $17.5 billion. While there is cautious optimism, increasing impairment charges and continued cost pressures continue to act as headwinds for the Saudi listed banks, KPMG said.

The report also said that decelerating GDP growth coupled with rising impairments and non-performing loans have pressured banks in the UAE. Net impairment charges on loans and advances increased 28 percent to $3.7 billion.

Higher impairments along with increased cost of funds lowered profits by 5.8 percent 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 percent.

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