Bullish Outlook For MENA Banks

The MENA region’s banking sector recovered from the global financial crisis last year and is expected to perform well this year, according to a new report issued by Frost & Sullivan.

“The MENA banking sector benefits due to areas such as high profit margins, high capital adequacy ratios, strong government backing, low international credit exposure, access to cheap cost of funds, stronger liquidity position and low-debt domestic products,” said the report.

The conservative risk practices adopted by MENA banks have paid off, with foreign assets primarily in the form of deposits denominated in US dollars and the rest in currencies of stronger European nations such as Germany and France, Frost & Sullivan said.

The asset growth (year-on-year) stood at an aggregate of 5.4 per cent in 2011 and 6.5 per cent as of June 2012 for the 81 banks in the Middle East.

Overall, assets recorded a Compound Annual Growth Rate (CAGR) of 20.4 per cent for 2003-2008 and are expected to grow at a CAGR of 7.5 per cent for 2008-2014.

MENA banks also have a low non-performing loans ratio when compared to their international peers, said the report. Non-performing loans as a percentage of total loans amounted to slightly less than four per cent in 2011.

The net loan to deposits ratio of regional lenders also stood at 34.5 per cent as compared to 80-85 per cent for European and US banks. This indicates a huge lending potential and a strong liquidity position, said Frost & Sullivan.

“While this ratio can be improved upon, precautions should be taken against excessive lending as this would imply taking increased risk and a weaker liquidity position, “ the report added.

In 2011, Middle Eastern banks recorded net income margins of 41.9 per cent, according to Capital IQ, and Frost & Sullivan forecasts the profit margin to be maintained at the same level in 2012.

“Overall, Frost & Sullivan has a bullish outlook on MENA banks and expects the MENA banks to serve as a good hedging instrument in the global banking sector,” the report said.