Subsequently, profits also increased significantly in 2011 and reached the highest level since the all-time high of 2007. Loan loss provisions (LLPs) fell by 2 percent although a number of banks that were previously not affected and had relatively low LLPs needed to make more provisions, according to a new study by The Boston Consulting Group (BCG).
Based on 2011 annual results as reported by the banks in the first quarter of 2012, the new study is part of BCG’s annual banking performance indices measuring the development of banking revenues (operating income) and profits for leading Middle East banks.
BCG launched the first edition of the banking performance index in the Middle East in April 2009, creating a customized index specifically for the regional banking markets, with 2005 revenues and profits as starting benchmarks. The index covers the largest banks in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE.
“The BCG index for 2011 includes 34 banks from across the GCC capturing nearly 80% of the total regional banking sector,” Dr. Reinhold Leichtfuss, Senior Partner and Managing Director in BCG’s Dubai office and leader of BCG’s Financial Institutions practice in the Middle East, said.
“The performance of Middle East banks in 2011 testifies to the strength of the GCC economies and banking systems. Furthermore, this performance is set against the backdrop of lower revenue and profit index levels amongst international banks. This widening gap means that despite some continuing challenges, the leading banks in the GCC can leverage this partial withdrawal of international banks to gain market shares and expand footprints,” he added.
While banks in Saudi Arabia, UAE, Kuwait and Bahrain had healthy revenue growth rates between four and eight percent in 2011, the banking systems in Oman and Qatar grew revenues by 11 and 22 percent, respectively. In addition, banks in all countries, except in Kuwait and Oman, achieved double digit aggregate profit growth rates.
While some banks in Qatar, Kuwait and UAE saw significant increases, those in Saudi Arabia, Oman and Bahrain were able to reduce their loan loss provisions. In absolute terms, loan loss provisions were highest in UAE and Kuwait.
In 2011, retail banking revenues in the GCC which had remained rather flat during the last few years experienced an uptick of some 3 percent, largely due to a 3 percent increase in Saudi Arabia and supported by strong growth in Oman and Qatar of around 20 percent and 39 percent respectively. In contrast, retail revenues in UAE and Bahrain dropped by 2 percent and 7 percent respectively. On the whole, the variance between growth rates of individual banks in retail is very high and ranges from -25 percent to +39 percent.
GCC retail profits, which had been declining in the previous years, saw a significant uptick of 11 percent overall and positive growth rates in all countries. Nevertheless, the profit level in 2011 remained slightly below 2005 and 2006 levels which were exceptional retail years in the GCC.
The corporate segment reached top index levels both in revenues and in profits in 2011. The growth was witnessed across all GCC countries with corporate banking profits rebounding particularly well in Saudi Arabia.
Although the 2011 upturn has been quite strong for GCC banks, returning to pre-crisis levels of growth in the foreseeable future is unlikely. This is even more so given that the region’s regulatory bodies are becoming more cautious with regards to lending and fee policies of banks. Therefore, the challenge of improving competitiveness in an environment of slower growth remains.
“The uptick in growth aids GCC banks in coping with the multiple challenges lying ahead. For instance, it helps in building more provisions against non-performing loans and in coping with investment needs. Still, sharpening competitiveness while containing cost growth remains a big challenge for banks.”
At the same time, the BCG study emphasizes that leading banks in the region have great opportunities, both within their respective markets as well as beyond. In particular, those who succeed in
“In a consistently developing two-speed world, the Middle East is located in a preferential place between Europe, Africa and the rising powers of India and China. This presents a big opportunity for well advancing Middle East banks.”