Will GCC banks act more resilient in 2018?

February 20, 2018 2:11 pm


It was more about fiscal consolidation than being adventurous in 2017 for the banking sector in the Gulf Cooperation Council (GCC), which has felt the ripples of continued low oil prices most. Though banks warded off liquidity concerns by keeping capital buffers intact and adopting more stringent lending criteria, the loan growth continues to be subdued.

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The recent policy rate hikes by GCC central banks in response to 25 basis points increase in interest rates by the US Federal Reserve will further impact borrowing costs. 2018 has rung in for Gulf banks with fresh challenges with the implementation of International Financial Reporting Standards 9 (IFRS 9) and the value-added tax (VAT).

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Getting innovative to stamp success

As banks face pressure of low profitability and tighter liquidity, mergers and acquisitions (M&A) are the way forward for many of them, especially in Bahrain and Oman, to create larger entities to stay afloat. Besides financial challenges, robotics, artificial intelligence and financial technology, popularly known as Fintech, have forced banks to embrace digital transformation. This has meant greater exposure to cyber threats and increased focus on creating a sound IT infrastructure to safeguard consumers’ interest.

“We are increasingly seeing banks looking to create efficiencies and find innovative ways to stay relevant to customers. There’s a gradual shift from banks looking to win the ‘battle of the balance sheet’ towards the ‘battle of the customer’,” says Omar Mahmood, Head (financial services), KPMG in the Middle East and South Asia.

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Stable outlook

According to Fitch Ratings, even though low oil prices, weakened sovereign ability and rationalized government spending have affected GCC banks’ financial metrics, two-thirds of them will maintain a stable outlook this year too. As oil prices have stabilized in the $50-65 bracket, the government bank loans have gone down. In fact, the governments have injected fresh liquidity through international debt issuances to ease the funding squeeze on banks.

In the UAE, government deposits in banks rose in October to $13.6 billion from $5.4 billion the previous month. In Bahrain, total deposits during the year grew over 5 percent to $52.8 billion. In Saudi Arabia, liquidity pressures have eased owing to record bond issuance of $17.5 billion in 2016. Kuwaiti banks tapped the debt markets to raise tier 1 and tier 2 Basel-III compliant funds exceeding $1 billion. Besides, banks have re-priced their loan books and are well-placed to benefit from further interest rate rises due to high levels of non-remunerated deposits.

“We expect capital levels to be largely unchanged in 2018 due to lower loan growth. Ratios are above international peers but buffers are only adequate given high concentration (single borrower and sector) and therefore event risk,” says Redmond Ramsdale, an analyst with Fitch Ratings.

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More mergers on cards in 2018

Bank analysts believe more banks are likely to merge in the coming future for better liquidity management and enhanced profitability. However, the ownership structure of banks in the region is a stumbling block in this direction and authorities need to further strengthen their legal, supervisory and licensing frameworks for smooth M&A.

The GCC banking sector has shown tremendous resilience in the face of fast-changing emerging macroeconomics, evolving consumer behaviour and altering regulations. Banks have accepted the fact that the era of high growth is behind them and they have to live with the “new normal”. If analysts are to be believed, the banking landscape will continue to change at operational and strategic levels.

 

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Alkesh Sharma
By Alkesh Sharma



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