Dubai: Key indicators point to quick recovery of GCC’s banking sector from the impact of COVID-19 on asset quality and profitability.
According to an analysis of financial data of 59 listed banks in the GCC by Kuwait based Kamco Invest, barring a few, most GCC banks have witnessed remarkable recovery during Q1 2021 backed by economic growth seen across the region.
Profits reached $8.4 billion during Q1 2021, up 62 per cent year on year and 14.2 per cent sequentially. Out of 59 listed banks in the region, merely 6 reported a quarter on quarter decline in profits during last quarter while 17 banks reported a year on year decline.
“The improvement was mainly led by a 41 per cent or $2.5 billion quarter on quarter drop in loan loss provisions (LLP) that reached a six-quarter low level of $3.6 billion in Q1 2021. This was partially offset by a decline in the topline as banks continue to deal with the low interest rate environment,” said Junaid Ansari, Head of Investment Strategy & Research at Kamco Invest.
At the country level, aggregate profits for banks in Kuwait, UAE and Bahrain more than doubled quarter on quarter, whereas Saudi Arabian banks reported a profit growth of 34 per cent.
Elevated operating costs
High operating costs continued to be a drag on banks’ net profits. The cost-to-income ratio for the sector remained elevated at 42.9 per cent at the close of the quarter. Nevertheless, there was a decline from one of the highest levels seen last year when it reached 43.7 per cent for the full year 2020.
At the country level, costs remain the highest in the case of Bahraini banks at 61.1 per cent followed by Omani banks at 47.6 per cent. Saudi Arabian banks also reported one of the highest cost-to-income ratios of 46.4 per cent. Qatari banks reported the lowest ratio of 31.1 per cent.
Marginal revenue decline
Total bank revenue for the GCC banks declined marginally by 0.6 per cent quarter on quarter during Q1 2021 after seeing a healthy growth of 5.7 per cent during the previous quarter. The decline in Q1 2021 was mainly led by a fall in net interest income that was partially offset by an increase in non-interest income.
Non-interest income grew for the third consecutive quarter during Q1 2021 increasing by 2.3 per cent quarter on quarter to reach $6.7 billion. The increase was led by higher non-interest income reported by banks in UAE, Saudi Arabia and Oman. On the other hand, after seeing growth during the previous two quarters, aggregate net interest income declined by 1.9 per cent during Q1-2021 to reach $14.4 billion.
Pressure on NIMs
“The decline in net interest income during Q1-2021 further lowered aggregate net interest margins (NIM) for the GCC banking sector as the ratio declined to one of the lowest levels over the last few quarters,” said Ansari.
Aggregate NIM for the GCC banking sector contracted to 2.8 per cent in Q1-2021 as compared to 2.9 per cent in Q4-2020. The consistent growth in earning assets over the last four quarters also contributed the decline. NIM contracted across the board in the GCC during Q1-2021, with UAE banks seeing the biggest quarter on quarter drop.
Sharp decline in provisions
Loan loss provisions (LLP) in Q1-2021 declined across the board in the GCC banking sector as compared to Q4 2020. Total provisions recorded during the quarter stood at a six-quarter low level of $3.6 billion as compared $6.1 billion during Q4-2020. UAE banks reported the biggest absolute sequential decline in provisions at 0.9 billion to reach $1.5 billion, still the highest in the GCC.
Credit growth holds the key for sustained recovery
The oil market has remained resilient since the start of the year backed by a demand revival as economies recover from the pandemic aided by vaccinations as well as restrained oil supplies. Crude prices have traded comfortably around the $65/b recently, thereby lowering the borrowing requirements for GCC governments.
The decline in credit offtake due to the uncertainties related to the pandemic had further added to pressure on banking profitability. Business failures during the pandemic also affected bottom-line performance, although support from the government did alleviate some concerns. Measures such as loan deferral programmes and the regulatory relaxations on the recognizing bad loans are gradually lifted this year, the sector could see deteriorating regulatory ratios and weaker asset quality.
Improving fiscal conditions, government spending and private sector investment demand is expected to boost credit demand across the region.
Central bank data on credit facilities grated by GCC banking sector for Q1-2021 also showed optimistic data for most of the countries in the GCC with growth in Saudi Arabia, Qatar and Kuwait.