Tuesday 28, March 2017 by Jessica Combes

GCC Banks’ revenue growth rate dived to low single-digit and profits shrunk in 2016

In 2016 GCC banks’ revenues grew by 5.2 per cent, down about two percentage points from 2015, after a drop of three percentage points from 2014, according to a recent study by The Boston Consulting Group.

The impact of the decline in oil prices has hit the banking industry. Due to a severe increase in provisions by 20.8 per cent, a cost growth of 6.3 per cent higher than revenue growth and a drop in extra ordinary income, profits declined by 3.2 per cent for the first time since 2008.

"The decline in profit is the first we’ve seen since 2008 for GCC banks. Nevertheless, this is not a reason for major concern, since the level of profits went up steadily for the last few years and is still very healthy,” said Dr. Reinhold Leichtfuss, Senior Partner & Managing Director at BCG's Middle East office.

The main customer segments, retail and corporate banking, grew revenues by 5.7 per cent and 4.5 per cent growth rates, respectively. Despite this moderate growth, the index of GCC banks still exceeded that of their international counterparts.

Based on the banks’ 2016 annual results released in the first quarter of 2017, the newest study is part of BCG’s annual banking performance indices measuring the development of banking revenues, operating income, and profits for leading GCC banks.

BCG launched the first edition of the banking performance index in the GCC in April 2009, creating a customised index specifically for the regional banking markets. The index covers the largest banks in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and in the UAE.

“The 2016 BCG Banking Performance Index includes 46 banks from across the GCC, capturing about 80 per cent of the total regional banking sector,” added Leichtfuss.

span style="font-family: Calibri; font-size: small;">Growth of GCC banks in 2016
Banking Performance Indices: GCC vs. International Banks

In 2016, Qatar banks led the pack in terms of growth numbers with 24.4 per cent in revenues, however, catapulted by the integration of acquired banks. Due to a massive increase in Loan-Loss Provisions (LLPs) in Qatar, largely for the same reason, profits declined slightly by 1.8 per cent.

“Traditionally, we report the revenue and profit developments of GCC banks independently, whether the revenue growth is organic or through acquisitions done at home or abroad. For our 2016 findings, it is worth mentioning the effect of the biggest integration of Finansbank by Qatar National Bank. Without this acquisition, Qatar would have only grown by 5.4 per cent and profit growth would be negative with 8.2 per cent,” said Leichtfuss.

On the other side of the spectrum UAE banks collectively had no revenue growth and saw a decline in profits by 4.5 per cent after an increase in provisions by 12.8 per cent. With the exception of Qatar all countries grew in the low single digits. All countries in the GCC had to deal with a negative development in profits.

Looking ahead to UAE Banks in 2017, Leichtfuss said that hopefully the difficulties for SMEs will be overcomes and slightly higher rates of revenue growth of, ideally, about five per cent could be seen.

He added that if interest rates increase globally then it will be good in the mid-to-long term for banks, particularly as European banks are currently suffering through a low interest rate scenario.

Banking Performance Indices: revenues and profits per country (2016 vs. 2015)
LLPs catapulted but varied significantly between the countries. Qatar had the highest increase with 140.2 per cent followed by Saudi Arabia with 39.9 per cent. The Kuwaiti banks on the other hand reduced provisions by 17.3 per cent. This is the strongest increase in LLPs since 2008 and about as high as the increase from 2008 to 2009. While in last year’s banking index report, increasing provisions in 2016 had been expected, the magnitude of the increase exceeded expectations.

Operating expenses grew by 6.3 per cent; higher than the previous year but significantly below the long term CAGR of ~12 per cent. The growth in Qatar is acquisition based and a distorted picture on cost growth. All other countries managed to remain below or close to their revenue growth; Kuwait banks even reduced costs overall.

Banking Performance Indices: Loan-Loss Provisions and Operating Expenses per country (2016 vs. 2015)
With this low growth year of 2016, GCC banks concluded a three year decline, from a high level in 2014. Long term, however, GCC banks experienced a halving of the long term growth rates. With the exception of the Saudi Arabia banks, all countries have from 2013 to 2016 arrived at around 50 per cent of the long term growth rate of 2005 to 2015.

span style="font-family: Calibri; font-size: small;">Long Term and Recent Growth Rates
Retail Revenues and Profits Showed Moderate Growth, Driven by Saudi Arabia
In 2016, retail banking revenues in the GCC experienced a further uptick of 5.4 per cent, largely due to an increase in Saudi Arabia’s revenue growth of 12 per cent.

GCC retail profits also grew predominantly due the positive development in Saudi Arabia, however UAE banks faced a decline of 13 per cent. The growth rate in all the other countries was moderate; only Qatari banks reached a double-digit growth rate with 13 per cent.

Retail Banking Growth (2016 vs. 2015)span style="font-family: Calibri; font-size: small;">
Corporate Banking Revenues Grew Moderately by 4.2 per cent While Profits Only Increased by 1.1 per cent

2016 was characterised by low corporate banking revenue growth in the large markets, while the three smaller markets grew at a high rate. Corporate banking profits, however, increased strongly in all markets with the exception of Saudi Arabia, which banks face a decrease of 20 per cent in growth.

span style="font-family: Calibri; font-size: small;">Corporate Banking Growth (2016 vs. 2015)
Superiority of Strategies, Business Models and Execution are Decisive for Different Long Term Performance of GCC Banks

“In 2016, only 10 per cent of GCC banks were able to achieve double digit revenue and profit growth. Slightly more than 50 per cent of banks experienced declining profits. Many more banks entered the slower growth range. The number of banks in 'group' and for the 'retail' and 'corporate' segments deviate, since not all banks have a complete segment reporting yet,” said Leichtfuss.

He added that according to BCG’s analysis, banks with superior strategies and strong business models can truly execute decisively and grow the strongest. Leaders still managed to achieve revenue and profit growth; however some of the fast runners of the past have slowed down.

Growth Distribution of GCC Banks (2016 vs. 2015)

Over the past decade, the leading banks have grown at double or triple the rate of the average ones. 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 digitisation of processes as the most important task that banks need to achieve – since this will enable advanced banks to reach the next level of customer experience as well as cost efficiency. Moreover new business opportunities are arising in the wake of the digital transformation." explained Leichtfuss.

 

  

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