Lenders weather low oil prices

10 June 2015

The Gulf’s biggest banks were broadly able to sustain asset growth in 2014, with MEED’s ranking showing little movement among the GCC’s top players

The lower oil prices that began to register in late 2014 are not yet translating into weaker performances in the GCC banking sector. The largest Gulf banks’ income statements and balance sheets from 2014 do not suggest that these lenders are in any serious difficulties. However, project activity will struggle to match previous years’ growth rates, and some erosion in credit demand is already apparent.

Overall, GCC banks engineered increased net earnings in 2014, capitalising on lower provisioning costs and expanding loan books, as well as upward shifts in fees and commissions revenues.

Major Gulf bank results ($m)
YearTotal assetsLoans and advancesCustomer deposits Net profit
Qatar National Bank
2014133,61487,100101,4002,970
2013125,92688,94394,9112,684
2012104,37772,38676,9122,327
201182,90953,28254,9302,062
201061,33636,16238,4661,566
National Commercial Bank
2014115,96758,85988,8182,344
2013100,60250,04680,1562,130
201292,06443,58472,9241,720
201180,31436,07563,8511,628
201075,30633,49661,1151,281
National Bank of Abu Dhabi
2014102,40952,89966,2121,516
201398,35350,58476,4181,288
201287,67045,96166,5821,280
201169,60543,42941,3321,009
201057,51937,25233,5211,003
Emirates NBD
201498,84866,97570,3241,399
201394,48471,87168,483942
201285,96765,28760,706749
201177,48547,91552,630689
201077,91653,65854,448637
Al-Rajhi Bank
201482,05654,91468,2681,823
201376,79559,14364,2581,891
201273,49144,13762,2662,113
201158,87937,43646,2451,967
201049,28632,02038,1551,805
National Bank of Kuwait
201474,39940,70038,500894
201372,95738,98440,838857
201257,55336,11333,3161,069
201148,89429,19124,3961,085
201045,84528,65723,3001,072
Kuwait Finance House 
201458,68157,42347,192417
201357,43731,95135,964412
201247,16527,63131,198282
201148,29526,36031,885288
201044,800na27,259379
Samba Financial Group
201457,97332,04943,605*1,334
201355,66130,82544,6991,224
201253,54128,41142,9551,158
201151,40223,76136,5991,147
201049,95621,40235,5931,182
First Gulf Bank
201457,77238,03238,4671,540
201352,51333,59737,5391,377
201247,08732,07234,3841,161
201142,87428,58528,1711,009
201038,33126,03526,883931
Riyad Bank
201457,22335,95943,7511,160
201356,36442,64536,4651,087
201249,71639,69632,930937
201148,23337,28330,124840
201045,79133,85628,279753
na=Not available. Sources: Fitch; Company results; MEED
 

Asset growth too has been solid across the region, although the rampant 20-per-cent-plus increases that the largest bank in the Middle East and North Africa, Qatar National Bank (QNB) showed in 2013 have not been repeated. That giant’s expansion of credit to the economy fell short of the previous year’s levels.

Bucking the trend

Saudi Arabia’s National Commercial Bank (NCB), which broke records with its initial public offering (IPO) in the fourth quarter, bucked that trend with a 15 per cent increase in total assets to $115.97bn.

However, the other big hitters in the top five GCC banks ranked by assets – notably National Bank of Abu Dhabi (Nbad) and Emirates NBD – revealed modest single-digit increases in asset growth in 2014.

QNB was both a beneficiary and a driver of Qatar’s strong growth, a country where banking sector assets grew by 11 per cent last year on the back of a 13 per cent increase in credit expansion to the local economy.

The overall rude health of Qatari banks was underlined by a robust 16.5 per cent increase in return on equity in 2014. QNB’s 10.3 per cent increase in net profit to $2.9bn confirms the lender’s continued capacity to generate earnings, even if lending is clearly weaker than in previous years.

QNB has also experienced inorganic growth, with acquisitions a key plank of its expansion policy.

QNB’s huge assets kept it at the top of the tree and sustained double-digit earnings growth for the fifth year in succession, if only just. Compared with boom years such as 2011, when net profit grew by nearly one-third, 2014 saw a more modest increase in the bottom line. Indeed, the 11 per cent increase is down from the 15.3 per cent growth it recorded in 2013.

In numbers

$6bn The value of Saudi Arabia’s National Commercial Bank’s initial public offering in 2014

16.5 per cent The percentage increase in return on equity for Qatar’s banking sector during 2014

Source: MEED

In terms of profits based on assets, Saudi Arabia’s Al-Rajhi Bank, the fifth-biggest by assets, was the strongest of the region’s largest banks in 2014. Like other lenders, the sharia-compliant Saudi giant has benefited from lower loan loss provisions.

“We’ve not seen any significant increase in non-performing loans at Al-Rajhi Bank. Despite the overall environment being less supportive because of the drop in oil prices, we expect the government to continue with its investment projects and we don’t expect to see any significant deterioration in asset quality,” says Mohamed Damak, global head of Islamic finance at US ratings agency Standard & Poor’s.

Al-Rajhi’s fellow Saudi bank – and soon to join it as an Islamic lender – NCB was the nearest competitor to QNB in terms of net profit, at $2.34bn. NCB saw a successful IPO in the fourth quarter of 2014, raising $6bn on the Saudi Stock Exchange’s (Tadawul’s) and the region’s largest-ever share sale.

That IPO came in a quarter that saw NCB show only a modest 1.7 per cent profit growth. It did little to dent full-year net earnings though, with a healthy  10.2 per cent increase mirroring QNB’s double-digit increase.

Saudi banks have been hit by exposures to construction companies that bore the brunt of the government’s crackdown on migrant labour implemented in late 2013. With many projects delayed, and these companies inevitably absorbing higher expenses as they are forced to recruit more Saudi nationals, banks too have been affected.

Strong performances

Some of the strongest earnings performances came from the UAE pair in the top five, Dubai’s Emirates NBD and Abu Dhabi’s Nbad.

The former’s 59 per cent increase in net income to $1.4bn was the standout figure in last year’s reporting season. This was strongly supported by an 82.3 per cent uplift in fourth-quarter net profit that reflected lower provision expenses and higher fee income.

According to analysts at Kuwait-based Global Investment House, the Dubai lender has benefited from its Egypt operations, as well as a favourable shift in the asset mix on account of retail and Islamic business.

According to the US’ Moody’s Investors Service, Emirates NBD benefits from a strong UAE franchise, with one of the largest market shares and highly diversified revenue streams and revenue-generating capacity. This, the ratings agency says, should enable it to absorb relatively high levels of impaired loans.

Nbad’s 18 per cent increase in net income is another robust showing for the Abu Dhabi bank and comes after a flat 2013 when earnings only grew by less than a percentage point.

Nbad expects 2015 to be tougher, however, with lower economic growth and fiercer competition crimping profit margins. Like other Gulf banks, Nbad is having to deal with low interest rates on their main lending activities. Nbad’s net interest margins (NIMs) declined slightly in the fourth quarter to 1.96 per cent. Margin compression looks set to remain a theme in 2015.

Al-Rajhi Bank represents the outlier in the top five GCC banks by assets. The Saudi lender, heavily exposed to retail loans – which tend to suffer greater impairment compared with corporate loans – showed a second successive year of lower profitability.

Its NIMs, like other banks, have been under pressure from weaker loan growth and reflect stronger competition in the crowded retail market. The kingdom’s second-largest listed bank saw its sixth straight drop in quarterly profit in the fourth quarter of 2014, which it attributed to lower total operating income.

This continued into the first quarter of 2015, when net profit fell by double-digits – 11 per cent – year-on-year.

Al-Rajhi Bank was the clear underperformer with net profit down 4 per cent and advances falling by 7 per cent.

Long-term, Al-Rajhi Bank’s biggest concern may be that NCB, committed to converting to sharia-compliance, may compete for business more aggressively in a space where until now it has had few challengers in the kingdom.

Favourable trends

In general, the biggest Gulf banks have benefited from several favourable trends that have offset some of the problems, such as net interest margin compression.

Last year, all GCC states saw lower loan loss provisioning (with the exception of Oman). Kuwaiti and Qatari banks, led by National Bank of Kuwait (NBK – the sixth-largest GCC bank) and QNB, have reported decreases in non-performing loan (NPL) provisions in the double-digits. This represents the strongest decrease in loan loss provisions for four years. Of the largest lenders, only Al-Rajhi Bank seems still to be showing a worse NPL performance.

Gulf banks increased net earnings in 2014, capitalising on lower provisioning costs and expanding loan books

An examination of the major Gulf banks’ loan books suggests some concern over lending growth, with a UAE Central Bank survey undertaken in the fourth quarter of 2014 finding signs that lending was in decline, with a slowing down of credit demand as the lower oil prices began to register across the Gulf. UAE government-related entities, and small and medium-sized enterprises scaled back their borrowing commitments amid tepid construction, real-estate and wholesale trade activity.

QNB for one will struggle to match the prodigious expansion of lending seen in recent years, having posted more than 20 per cent lending growth for five quarters in a row. The slowdown last year reflected the significant delays to key infrastructure projects. In this it is not alone. In November 2014, Qatari banking sector credit growth was estimated at 6.1 per cent, the lowest for about eight years.

Favourable trends have offset some of the problems such as net interest margin compression

NCB, on the other hand, showed a 17.6 per cent increase in loans and advances at the end of December 2014, to $58.9bn, but this was not the experience of the Saudi banking sector as a whole. According to an analysis of the sector by the local Aljazira Capital, credit growth, at 11.6 per cent in 2014, was slightly lower than deposit growth of 12. 4 per cent.

Open stock market

Still, there is much for the largest Saudi banks to get their teeth into, even in a low oil price environment. The opening up of the Tadawul to foreign investors from mid-June should provide further buoyancy and attract more spend in the infrastructure sector, which would provide follow-through for Saudi banks’ loan portfolios.

Some lenders in the kingdom have enjoyed robust growth opportunities, notably Banque Saudi Fransi, which reported a 36 per cent increase in net income to $936m in 2014.

Al-Rajhi Bank apart, most of the Islamic lenders in the GCC’s top 20 banks performed well in 2014, underlining that sharia-compliant banks are seeing asset growth at rates above the conventional segment average. This means they will boost their market share, albeit from a low base. Dubai Islamic Bank, which showed a 63 per cent increase in profit in the fourth quarter, reported some of the strongest earnings.

Kuwait Finance House, another Islamic lender, reported a strong increase in loans and advances last year, helping solidify profit of $417.5m.

Moody’s says it expects the unique interlinkages that exist between oil, public spending and banks in the region will first result in reduced banking system liquidity, with secondary effects on credit growth and profitability.

For the biggest GCC banks, conditions will be more challenging this year. But, as many have shown, even in straightened times it is possible to grow assets and deliver bottom line growth.

Note: This data table accompanying this article has been updated to correct Ahli United Bank’s financial result, which should have shown a 2.4 per cent rise in assets between 2013 and 2014

 

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications