Dubai: Strong economic growth across the GCC is boosting the Islamic banking assets and profit growth in the region, despite some margin compression experienced by the banking sector due to soft interest rate environment, according to global credit rating agency Standard & Poor’s.
“Historically low global interest rates have contributed to softening margins for Gulf banks because they operate generally with large non-interest-bearing liabilities, such as large current account balances, which provide the banks with a revenue generation advantage when interest rates are higher. The softening has been more visible in Islamic banks’ margins,” said Timucin Engin, Director Rating Analytical, Financial Institutions at S&P.
The rating agency believes that most of the margin erosion is now behind the industry, although some spillover effects of this could be seen through rest of this year and 2015 due to price competition in loan markets.
Islamic banks’ asset growth is outstripping their conventional peers especially in Qatar and Saudi Arabia. Despite similar credit growth environment across the GCC, Islamic banking asset growth across the region differed largely due to differing volumes of government spending and the level of government support the Islamic banking sector received.
Islamic banks in Qatar grew their balance sheets by 28 per cent between 2009 and 2013 as they capitalised on the government’s large investments. In addition, the Qatari government’s recent initiatives, such as banning conventional banks from engaging in Islamic banking and establishing a new Islamic bank, Barwa Bank, have helped Islamic banks in Qatar grow faster than their conventional peers.
While Islamic banks in Saudi Arabia have increased their balance sheets by 17 per cent on average over the same period, UAE based Islamic banks’ aggregate asset base grew by 16 per cent between 2009 and 2013.
After displaying a compound annual average asset growth rate of 17.6 per cent between 2009 and 2012, compared with just 8.1 per cent for the conventional banks, Islamic banks’ balance-sheet growth slackened in 2013. While it still moderately outpaced that of conventional banks at 12 per cent in 2013, compared with 11 per cent for the conventional banks it was nonetheless noticeably slower than the rates in 2009-2012.
With corporate asset quality and the business environment continue to improve in the Gulf region, Islamic banks are increasing recoveries on advances and loans, respectively, and showing lower losses on new credit exposures.
Islamic banks’ ratios of nonperforming advances to total advances decreased 60 basis points to 4 per cent last year. “We expect continued declines in 2014. Moreover, loss coverage of loans and advances continues to gradually increase,” said Engin.