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GCC banks maintain profit growth despite slowing revenues

Decline in provisions and operating costs supports profitability

Gulf News

Dubai: The Gulf Cooperation Council banks achieved a 6 per cent profit growth in 2017 despite a 2 per cent decline in revenue growth, signalling gains in cost management and lower loan loss provisions, according to BCG’s GCC Banking Performance Index, an annual study on the region’s banking sector performance.

The study, based on the latest financial data of leading banks in the region found that in 2017, GCC banks’ revenues grew by 2.3 per cent, down about 3 percentage points from 5.4 per cent in 2016.

The main customer segments — retail and corporate banking — grew revenues at rates of 3 per cent and 5.4 per cent, respectively.

“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.

 Although implementation of digital strategies are likely to see costs of these banks going up in the short term, over a longer time horizon, digitisation is expected to bring significant gains in terms of cost savings.”

 - Dr Reinhold Leichtfuss | Senior Partner & Managing Director at BCG’s Middle East office 


While the top-line growth continues to moderate, bottom line improvements were supported by a sharp decline in loan loss provisions (LLPs) by 2.7 per cent last year compared to 2016. The 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.

Going forward, GCC banks are expected to gain from lower provisions and cost savings. “Tighter risk appetite of banks combined with optimisation of loan portfolios following the implementation of credit bureau is expected to boost the credit quality of banks, ultimately improving their profitability,” said Dr Leichtfuss.

The study shows control on operating costs is a decisive factor in the profitability of regional banks. Most banks managed to reduce their operating expenses, leading to a cost reduction of 1 per cent on aggregate for the large GCC banks last year.

Operating expenses were well controlled in the GCC countries last year. 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 (compounded annual growth rate) of about 11 per cent.

In their efforts to manage operating costs effectively, many leading banks in the region have started investing in digital strategies. “Although implementation of digital strategies are likely to see costs of these banks going up in the short term, over a longer time horizon, digitisation is expected to bring significant gains in terms of cost savings,” Dr Leichtfuss said.

Despite moderate growth, the index of GCC banks still exceeds that of their international counterparts, which, however, saw stronger growth in 2017. 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.

 

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