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GCC banking sector remains resilient in challenging times: report

The overall outlook for the GCC’s banking sector is currently positive, according to KPMG’s results report on GCC-listed banks, which analyses the published 2016 financial statements of 56 leading listed commercial banks across the region.

The research, which covers more than 90 per cent of the region’s listed banking assets, indicates that banks have performed well over the past 12 months, considering margin compressions, increased impairment charges and increased funding costs.

Whilst overall net profit has declined year-on-year for the first time in recent years, asset growth has remained robust, at 6.5 per cent on average across the region.

Battle of the balance sheet

Commenting on the results, Omar Mahmood, Head of Financial Services for KPMG in the Middle East and South Asia, said: “In what has been a politically eventful year globally, most of the banking sector-specific challenges have remained the same over the past 12 months and the drop in profits reflects this. However, with challenges come opportunities and we are increasingly seeing banks looking to create efficiencies and find innovative ways to stay ahead. One example of this is the gradual shift from banks looking to win the ‘battle of the balance sheet’, towards a focus on the ‘battle of the customer’, with banks looking at new ways to ensure loyalty by taking a customer experience-focused approach.”

Adrian Quinton, Head of Financial Services for KPMG in Saudi Arabia, said: “Profitability for the listed banks in the Saudi Stock Exchange in 2016 has slightly decreased by 5.4 per cent as compared to the previous year. It was a result of higher impairment charge on loans and advances which increased 44.7 per cent in 2016 in comparison with 1.5 per cent in 2015, while return on assets slightly decreased across almost all banks given the challenging market conditions.”

Global regulations a challenge

Changing global regulatory requirements have clearly had an impact on the sector in the GCC, with a number of positive changes being made to bring banks in line with new requirements.

Capital adequacy ratios now stand at over 18 per cent across the region – above the minimum limits set in Basel III, reflecting effective capital raising activity. Similarly, Basel III requirements are the likely reason for a rise in liquidity ratios across most countries, demonstrating a commitment to adhere to broader global regulations.

Quinton went on to say: “Saudi banks faced a very challenging year in 2016. However, the positive measures taken in 2016 including Vision 2030 should translate into a positive long-term outlook for the sector.”

Qatar rift: Banks will lose

Meanwhile, the latest diplomatic rift between Qatar and its Middle East rivals is believed to pose at least short-term threat to the banks in the region. Reports have suggested that some banks in Saudi Arabia and the UAE are holding off on doing business, such as letters of credit, with Qatari banks.

However, the UAE Central Bank has said that all payment and remittance operations remain normal and the country’s financial system is positioned to support this.

The fate of Qatar National Bank’s first branch in Saudi Arabia, which opened last month in Riyadh, is still unknown. There was no immediate reaction to a mail sent to the bank.

Qatar ratings

The rating agency S&P Global Ratings in March downgraded its outlook for Qatar to negative from stable on concern that the growth of the country’s external debts may continue to outpace the growth of the size of its investments internationally. However, S&P maintained its AA/A-1+ rating on the country, putting it firmly in the high quality credit rating band on the agency’s rating scale.

Moody’s Investors Service downgraded Qatar’s credit rating by one notch on May 26, citing increasing external debt and uncertainty over the sustainability of the country’s growth model over the next few years.

The rating agency then downgraded Qatar’s long-term issuer and sovereign debt ratings to Aa3 from Aa2, but changed its outlook on the Middle Eastern nation to stable from negative, citing optimism around the implementation of fiscal and economic reforms. Moody’s said that the regional rift could have a negative impact on Qatar if it disrupts trade and capital flows.