GCC banks face new paradigm of smaller profits, tightening liquidity

KPMG report says region's banking sector has fared well during 2015, outlook is relatively positive
GCC banks face new paradigm of smaller profits, tightening liquidity
By Staff writer
Thu 05 May 2016 08:40 AM

The Gulf's banking sector has entered a new paradigm of tightening liquidity, moderate profit growth and greater focus on cost reduction, according to a new report by accountancy giant KPMG.

Its first GCC listed bank results report, analysing the financial statements of 56 leading commercial banks across the region, highlighted a widespread need for greater capital and funding.

However, KPMG added that banks have, on the whole, fared well during 2015 and the outlook for the coming years remains relatively positive given the expectation of continued government support for the sector and committed infrastructure investment.

The report said that 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 percent and 6.3 percent respectively.

"The continued rise in profitability and assets is largely due to the careful planning and the cautious approach adopted by banks," KPMG said.

The report suggested that consolidation in the form of mergers and/or reorganizations could possibly take place in the near future as a result of stiff competition and increasing pressures on costs.

Net impairment charges declined year on year by an average of 9.2 percent, reflecting the more cautious approach to lending adopted by banks in previous years.

"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," said Jalil Al Aali, head of financial services at KPMG Bahrain.

"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."

He added: "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. 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."

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