Arab Gulf Banks Recover After A Year Of Stagnation

The banking industry in the Middle East witnessed a healthy revenue growth of seven per cent in 2011 after a year of stagnation and the strong recovery was led by GCC banks, according to the latest Middle East Banking Index of Boston Consulting Group (BCG).

The overall profits of Middle East banks increased significantly in 2011, reaching the highest level since the all-time high in 2007. Loan loss provisions (LLPs) fell by two per cent although a number of banks that were previously not affected and had relatively low LLPs needed to make more provisions.

While banks in Saudi Arabia, the UAE, Kuwait and Bahrain had healthy revenue growth rates between four per cent and eight per cent in 2011, those in Oman and Qatar grew revenues by 11 per cent and 22 per cent, respectively. In addition, banks in all countries except in Kuwait and Oman achieved double-digit aggregate profit growth rates.

“The performance of Middle East banks in 2011 testifies to the strength of the GCC economies and banking systems. Furthermore, this performance is set against the backdrop of lower revenue and profit index levels amongst international banks,” said Dr Reinhold Leichtfuss, senior partner and managing director in BCG’s Dubai office and leader of BCG’s Financial Institutions practice in the Middle East.

“This widening gap means that despite some continuing challenges, the leading banks in the GCC can leverage this partial withdrawal of international banks to gain market shares and expand footprints.”

According to the BCG study, the UAE banking industry experienced an impressive 24 per cent increase in profits in 2011, exceeding profit levels since 2005. Revenues also saw a healthy six per cent growth in 2011.

The positive news for the UAE banking sector comes despite an increase in loan loss provisions which increased by four per cent in 2011. Moreover, operating expenses rose by 12 per cent.

“Strong profits were witnessed by the UAE banking sector in 2011 despite an increase in loan loss provisions. Compared to 2010, the profitability of corporate banking increased by 13 per cent in 2011, while revenues grew by seven per cent. Retail banking profits saw a more modest gain of five per cent, while retail revenues actually declined by two per cent,” said Leichtfuss.

While some banks in Qatar, Kuwait and the UAE saw significant increases, those in Saudi Arabia, Oman and Bahrain were able to reduce theirs. In absolute terms, loan loss provisions were highest in the UAE and Kuwait. In 2011, retail banking revenues in the GCC, which had remained rather flat in the last few years, experienced a rise of some three per cent, largely due to the three per cent increase in Saudi Arabia and supported by strong growth in Oman and Qatar of around 20 per cent.

In contrast, retail revenues in the UAE and Bahrain dropped by two per cent and seven per cent respectively.

GCC retail profits, which have declined in previous years, saw a significant 11 per cent rise overall and positive growth rates in all countries. Nevertheless, the profit level in 2011 remained slightly below those of 2005 and 2006 which were exceptional retail years in the GCC.

The corporate segment reached top index levels both in revenues and profits in 2011. The growth was witnessed in all GCC countries with corporate banking profits rebounding particularly well in Saudi Arabia.

Although the 2011 upturn has been quite strong for banks in Saudi Arabia and across the GCC, returning to pre-crisis levels of growth in the foreseeable future is unlikely; even more so given the region’s regulatory bodies are becoming more cautious with regards to lending and fee policies of banks. The challenge of improving competitiveness in an environment of slower growth remains, Gulf News reported.

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