Small GCC Banks Most Likely To Outperform

The question on many people’s minds on seeing the Gulf Business list of Top 10 Performing Banks in the GCC  is why there are four Saudi, two Omani and two Kuwaiti banks, and only one from the UAE and Qatar, and why these banks are relatively unknown.

It can’t be denied that these surprise entrants edged out better recognised banking giants. The obvious reason for that would be that most of the top ten profit growers come from a lower base than their weightier counterparts. Bank Al Bilad, for instance, that topped our list with a phenomenal 385 per cent profit growth in H1 2012 and an equally impressive profit increase of 257 per cent in 2011, is only the second-smallest bank by market value in KSA. But this is not the only reason for its mammoth profit rise. Results were also propped up by a 65 per cent growth in fees and commission income, as well as a 16 per cent rise in income from investing and financing activities. Similarly, Bank Al Jazira, Alinma Bank and Saudi Hollandi clocked in between 115 to 25 per cent profit growth, primarily due to a large increase in loan books.

This is evidence of a grassroots regional recovery, as banks – especially in Saudi Arabia – feel the buoying effects of mega-government sprees.

It’s well known that the Saudi Arabian banking sector is one of the most profitable banking industries in the Middle East. With net profit margins of 62.8 per cent, return on assets at 2.1 per cent and return on equity at 14.3 per cent in first half of 2012, Saudi Arabia’s non-performing loans to total loans stand at two per cent, which is much lower than the Middle East average of four per cent.

The GCC’s richest Kingdom is reaping the bumper benefits of traditionally conservative fiscal policies, adequate lending practices, technological advancements, solid underwriting standards and a billion-dollar government-spending spree, fuelled by the Arab unrest.

Going forward though, Qatari banks are most likely to outperform, lent by large infrastructure spends due to 2022, impressive GDP growth of 15-16 per cent, and large fiscal surpluses and public spending that’s propelling loan growth.

Oman may have the smallest banking sector in the GCC, but it’s expected to get on solid footing this year. After profitability and funding declined during 2008, along with an increase in non-performing loans, the country has witnessed a turnaround. Consumer lending and loan assets are becoming firmer even as the government ramps up efforts to increase the standard of living.

Banks in the UAE are also seeing a gradual recovery with strong capital adequacy ratio – especially compared to international standards – increased liquidity, and funding improvement, even though wholesale funding remains costly and difficult.

Kuwait is not to be left behind, and despite being hit in 2008-09 with declines in the stock market, massive losses at Gulf Bank, and an increase in NPLs, their financial position is strengthening, although NPLs remain high and the major government spending spree is yet to be realised.

Of all the GCC countries, Bahrain faces the most challenges. Due to political unrest and volatility there’s been pressure on asset quality, earnings and profit. Real estate exposure is an issue, and wholesale and investment banks, like Gulf Finance House, Investcorp and Arab Bank Corporation, have been hard-hit.

Overall, though, the region’s banks are poised for a modest and steady recovery. As long as there are low-cost deposits, asset quality and de-risking of balance sheets, there should be no impediment to this growth.