UAE. According to a new study by The Boston Consulting Group (BCG), the banking industry in the GCC grew at a lower rate in 2016 than it did in 2015 with just a 5.2 percent increase, stemming almost exclusively from major customer segments such as retail and corporate banking.
While still remaining high, profits declined for the first time since 2008. The major reason for this development is a very significant increase in provisions by 20.8 percent.
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 customized 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 decline in profit is the first we see 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 2016 BCG Banking Performance Index includes 46 banks from across the GCC, capturing about 80 percent of the total regional banking sector,” added Dr. Leichtfuss.
Qatar Banks Leading the GCC with Highest Revenue Growth while UAE Banks in Aggregate Showed No Revenue Growth
In 2016, Qatar banks led the pack in terms of growth numbers with 24.4 percent 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 percent.
“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 percent and profit growth would be negative with 8.2 percent” stated Dr. Leichtfuss.
On the other side of the spectrum UAE banks collectively had no revenue growth and saw a decline in profits by 4.5 percent after an increase in provisions by 12.8 percent. 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.
LLPs catapulted but varied significantly between the countries. Qatar had the highest increase with 140.2 percent followed by Saudi Arabia with 39.9 percent. The Kuwaiti banks on the other hand reduced provisions by 17.3 percent. 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, we had expected increasing provisions in 2016, the magnitude of the increase exceeds expectations.
Operating expenses grew by 6.3 percent; higher than the previous year but significantly below the long term CAGR of ~12 percent. 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.
With this low growth year of 2016, GCC banks conclude 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 percent of the long term growth rate of 2005 to 2015.
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 percent, largely due to an increase in Saudi Arabia’s revenue growth of 12 percent.
GCC retail profits also grew predominantly due the positive development in Saudi Arabia, however UAE banks faced a decline of 13 percent. The growth rate in all the other countries was moderate; only Qatari banks reached a double-digit growth rate with 13 percent.
Corporate Banking Revenues Grew Moderately by 4.2 percent While Profits Only Increased by 1.1 percent
2016 was characterized 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 percent in growth.
Superiority of Strategies, Business Models and Execution are Decisive for Different Long Term Performance of GCC Banks
“In 2016, only 10 percent of GCC banks were able to achieve double digit revenue and profit growth. Slightly more than 50 percent 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,” stated Dr. Leichtfuss.
“According to BCG’s analysis, it is obvious that 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”
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 digitization 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 Dr. Leichtfuss.
Photo Caption: Dr. Reinhold Leichtfuss, Senior Partner & Managing Director at BCG's Middle East office
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