Tuesday 26 March 2019

Dr Reinhold Leichtfuss and Peter Vayanos

GCC banks see bigger growth in profit than revenues

DUBAI, April 3, 2018

GCC banks were able to grow profits in 2017 with a rate more than twice as high as revenues; despite the industry growing at a lower rate last year than it did in the previous year with just a 2.3 per cent increase, said a report.

Loan Loss Provisions (LLPs)were reduced once again and moreover, most banks managed to reduce their operating expenses, leading to a cost reduction of 1 per cent on aggregate for the large GCC banks, added the annual banking index from global management consultancy Boston Consulting Group’s (BCG).

"GCC banks are adapting well to a slowing revenue growth regime and profits climbed more than twice as strong through reduced loan loss provisions as well as tight cost management,” said Dr Reinhold Leichtfuss, senior partner & managing director at BCG's Middle East office.

Based on the banks’ 2017 annual results released in the first quarter of 2018, the latest study is part of BCG’s annual banking performance indices, which measure the development of banking revenues (operating income) and profits for leading GCC banks.

“The 2017 BCG Banking Performance Index includes 44 banks from across the GCC, capturing about 80 per cent of the total regional banking sector,” added Peter Vayanos, successor of Dr Leichtfuss as head of the Financial Institutions practice for BCG ME.

International banks saw strong top line growth close to 5 per cent in 2017 and an even stronger recovery in profits in 2017; however, remain far behind GCC banks regarding the index level.

In 2017, Kuwait banks led the pack in terms of growth figures, with 6.6 per cent in revenues and 15 per cent in profits. While in 2016 many banks across all countries in the GCC experienced a negative development in profits, in 2017, the vast majority of banks grew profits stronger than revenues except for Oman. “This is a pattern we have been seeing in more mature banking markets, such as in Europe or the US, for a number of years,” stated Vayanos.

“The two largest markets, UAE and Saudi Arabia, are naturally closer to the average, with UAE still close to zero revenue growth the second year in a row. The positive message is the healthy profit growth of UAE banks, at 4.6 per cent,” stated Dr Leichtfuss. “The revenue growth stagnation stems from a tighter risk appetite as well as portfolio optimization initiatives of banks which seek to enhance risk-adjusted returns.”

As for LLPs, 2017 showed healthy improvement of 2.7 per cent in contrast to 2016, when LLPs had catapulted upwards. UAE and Oman experienced the strongest declines of 8.4 and 16.5 per cent respectively, followed by Saudi Arabia with 6.5 per cent.

Moreover, operating expenses were well controlled in the GCC countries. Even the UAE banks reduced this figure by 2.7 per cent in total, led by the country’s largest banks, and Qatar banks by 6 per cent while Saudi Arabia banks managed to keep costs constant. All countries remained significantly below the long-term cost CAGR of ~11 per cent.

In 2016, GCC banks concluded a three-year decline in growth, down from a high level in 2014. In the long term, however, GCC banks experienced a halving of overall growth rates. In 2017, Kuwait was the only country in which the growth rate bounced back from low level.

Moderate growth in retail revenues with stronger growth in profits

In 2017, retail banking growth shows strongly diverging trends across the GCC countries around the average of 3 per cent revenue growth and 14 per cent profit growth. Retail banking in Saudi Arabia grew revenues by 7 per cent and profits by 24 per cent, while UAE banks in total saw a decline in retail revenues by 2 per cent but a profit growth of 15 per cent. Qatar banks achieved a revenue growth of 12 per cent but experienced a sharp profit decline of 22 per cent. Bahrain banks had to accept a decline of 3 per cent in both retail revenues and retail profits.

Saudi Arabia and Qatar saw strong corporate banking revenue growth around 7 to 8 per cent, and achieved good profit growth as well. UAE banks again saw stronger growth in profits than in revenues. Kuwait takes a significant drop in profits owing to a strong increase in LLPs.

In 2017, only18 per cent of GCC banks were able to achieve double digit revenue growth, while twice as many experienced double digit profit growth. The positive profit trend is reflected in that only 7 per cent of banks saw negative profit growth. The number of banks in 'group' and for the 'retail' and 'corporate' segments deviate, since not all banks have a complete segment reporting yet,” stated Vayanos.

“According to BCG’s analysis, it is clear that banks with superior strategies and strong business models can truly execute decisively and achieve the strongest growth.”

Over the past decade, the region’s leading banks have grown at double or triple the rate of its average banks. In almost all cases, such a development is based on a superior and consistently-executed strategy.

“In the coming three to five years, we consider the digitization of processes as the most important task that banks need to achieve; this will enable advanced banks to achieve the next level of customer experience as well as cost efficiency. Moreover, particularly in the banking sector, new business opportunities are perpetually arising in the wake of the continued digital transformation," concluded Dr Leichtfuss. – TradeArabia News Service

Tags: BCG | GCC banks |

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