Banks in the Arabian Gulf have been outperforming international counterparts in terms of revenues and profitability, and despite the drop in oil they are expected to continue to lead the way.
Unlike many international banks, most Middle Eastern lenders came out of the financial crisis of 2008 stronger as they were not weighed down by fines and an increasingly stricter regulatory environment, according to the Boston Consulting Group.
“There’s a new financial crisis in the sense of paying fines, and if you look at revenue growth of international banks and the profit growth, they still are far behind from pre-crisis levels,” said Reinhold Leichtfuss, a senior partner and managing director at BCG.
“And I think a couple of years ago many may have thought the worst was behind them, but then you start paying billions of dollars in terms of fines and that, especially if you have a presence in the US, that can become quite expensive.”
According to a study released last week by BCG, the region’s bank revenues grew by 10 per cent in 2014 as a whole, while profits rose 14.7 per cent. And Mr Leichtfuss expects similar revenue growth next year despite the decline in the price of oil, which most countries in the region rely heavily upon to fund their budgets.
The BCG banking revenue performance index for Gulf banks rose to 275 in 2014 from 250 in 2013, while their international peers declined to 108 from 109 in the previous year on the index. The index started at a base of 100 in 2005 and it includes 40 banks from the GCC, representing 80 per cent of all banks. The GCC comprises Saudi Arabia, the UAE, Bahrain, Qatar, Oman and Kuwait. BCG did not provide a breakdown of what makes up its international bank index.
Regional banks have been aided in the past couple of years by economic growth that has exceeded the global average amid elevated oil prices and government spending on infrastructure. Record low interest rates have also contributed to the growth of banks as individual customers tap debt to fund everything from cars to homes. During the same time frame, the power to lend among European and US banks has been diminished.
“Middle East banks were able to outperform international banks since the financial crisis because of the higher economic growth in the region and as they suffered lower credit losses, trading losses and had better capital positions and stronger pre-provision earnings capacity,” said Jaap Meijer, head of financial services at the Dubai-based investment bank Arqaam Capital.
“Losses on toxic assets were virtually avoided as exposures remain much smaller than at US and European banks. The leverage ratios in Europe and to a much lesser extent US were so much higher than in our region.”
While BCG is optimistic about the prospects of Gulf banks in light of projected lower economic growth this year, other analysts such as the rating agency Standard & Poor’s are concerned that banks in oil-exporting countries may face higher credit losses and lower profitability as economies grow at a slower pace. Standard & Poor’s in March singled out Nigeria, Bahrain, Oman and Brunei as countries with banks that may face the biggest challenges.
On Thursday, S&P said it had lowered its outlook to stable from positive for Mashreq and Abu Dubai Commercial Bank to reflect the “weakening local economic conditions in the banking system”.
“After a few years of improving asset quality, declining loan losses, and improving financial performance UAE banks have now entered into a more challenging operating environment,” it said.