Dubai: Key indicators point to rapid recovery of GCC banking sector after COVID-19 impact on asset quality and profitability.
According to an analysis of financial data of 59 GCC listed banks by Kuwait-based Kamco Invest, with the exception of a few, most GCC banks experienced a remarkable recovery in the first quarter of 2021, supported by the economic growth observed throughout the region.
Profits reached $ 8.4 billion in the first quarter of 2021, up 62% year-on-year and 14.2% sequentially. Of 59 listed banks in the region, only 6 reported a quarter-over-quarter decline in profits in the last quarter, while 17 banks reported a year-over-year decline.
The improvement is mainly due to a 41% or $ 2.5 billion quarter-on-quarter decline in loan loss provisions (LLP) which reached a six-quarter low of $ 3.6 billion in the first. quarter 2021. This was partially offset by lower revenue. as banks continue to face the low interest rate environment, ”said Junaid Ansari, Head of Investment Strategy and of research at Kamco Invest.
At the country level, aggregate profits of banks in Kuwait, UAE and Bahrain more than doubled quarter over quarter, while Saudi banks saw profit growth of 34%.
High operating costs
High operating costs continued to weigh on banks’ bottom lines. The industry’s cost-to-revenue ratio remained high at 42.9% at the end of the quarter. Nonetheless, there was a drop from one of the highest levels seen last year when it hit 43.7% for the whole of 2020.
At the country level, costs remain highest for Bahraini banks at 61.1 percent, followed by Omani banks at 47.6 percent. Saudi Arabian banks also reported one of the highest cost-to-income ratios of 46.4%. Qatari banks recorded the lowest ratio, at 31.1 percent.
Marginal drop in income
Total banking revenues of GCC banks edged down 0.6% quarter-on-quarter in the first quarter of 2021 after recording healthy growth of 5.7% in the previous quarter. The decrease in the first quarter of 2021 is mainly due to a decrease in net interest income which was partially offset by an increase in non-interest income.
Non-interest income increased for the third consecutive quarter in the first quarter of 2021, increasing 2.3% quarter-on-quarter to $ 6.7 billion. The increase was led by higher non-interest income reported by banks in the United Arab Emirates, Saudi Arabia and Oman. On the other hand, after growing in the previous two quarters, aggregate net interest income declined 1.9% in the first quarter of 2021 to $ 14.4 billion.
Pressure on NIMs
“The decline in net interest income in the first quarter of 2021 further reduced aggregate net interest margins (NIMs) for the GCC banking sector, as the ratio fell to one of the lowest levels in the world. last quarters, ”Ansari said.
The overall GCC banking sector NIM contracted to 2.8% in the first quarter of 2021 from 2.9% in the fourth quarter of 2020. Steady growth in productive assets over the past four quarters has also contributed to the decline. drop. NIM contracted in all GCC countries in the first quarter of 2021, with UAE banks posting the largest quarter-over-quarter decline.
Sharp drop in provisions
Provisions for loan losses (LLP) in the first quarter of 2021 decreased in the entire banking sector of the GCC compared to the fourth quarter of 2020. The total of provisions recorded during the quarter was at a low level. six quarters of $ 3.6 billion, up from $ 6.1 billion in the fourth quarter of 2020. UAE banks reported the largest sequential absolute decline in provisions at 0.9 billion to $ 1.5 billion, still the highest in the GCC.
Credit growth is the key to a sustainable recovery
The oil market has remained resilient since the start of the year, supported by a recovery in demand as economies recover from the pandemic thanks to vaccinations as well as tight oil supplies. Crude prices have traded comfortably around $ 65 / bbl recently, reducing the borrowing needs of GCC governments.
The decline in credit withdrawals due to uncertainties linked to the pandemic had further increased the pressure on bank profitability. Business failures during the pandemic also affected the bottom line, although government support eased some concerns. Measures such as loan deferral programs and regulatory relaxations on bad debt recognition are gradually lifted this year, the industry could see its regulatory ratios deteriorate and asset quality deteriorate.
Improved fiscal conditions, public spending, and private sector investment demand are expected to boost demand for credit in the region.
Central bank data on credit facilities provided by the GCC banking sector for the first quarter of 2021 also showed optimistic data for most of the GCC countries with growth in Saudi Arabia, Qatar and Kuwait.