S&P in a report published on Tuesday titled “Gulf Islamic Banks Continue To Grow Faster Than Their Conventional Peers, But Profitability Rates Are Converging” said the profitability rates for the two banking models are converging as Islamic banks are taking a more pronounced hit from lower interest rates and non-core banking revenues than their conventional peers because they traditionally operate with larger bases of non-interest bearing liabilities.
“We think Islamic banking will continue to increase its market share in the Gulf, and we expect the operating environment over the next two years to remain supportive for Islamic banks’ credit quality,” Standard & Poor’s credit analyst Timucin Engin, said.
That said, low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers.
Unless we see a cycle of higher interest rates that would help Islamic banks to expand their net interest margins, we expect to continue to see convergence between conventional and Islamic banking returns in the GCC region over the next few years.
Islamic banks used to be able to rely on strong returns from non-banking activities such as capital markets and real estate owing to the inflationary asset valuation cycle in the region. After their recent credit losses we now expect them to have similar provisioning levels to their conventional peers.
“We believe the convergence of returns between the conventional and the Islamic banking models in the GCC region is here to stay,” Engin, added.