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)|
|Year||Total assets||Loans and advances||Customer deposits||Net profit|
|Qatar National Bank|
|National Commercial Bank|
|National Bank of Abu Dhabi|
|National Bank of Kuwait|
|Kuwait Finance House|
|Samba Financial Group|
|First Gulf Bank|
|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 giants expansion of credit to the economy fell short of the previous years levels.
Bucking the trend
Saudi Arabias 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 Qatars 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. QNBs 10.3 per cent increase in net profit to $2.9bn confirms the lenders 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.
QNBs 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.
$6bn The value of Saudi Arabias National Commercial Banks initial public offering in 2014
16.5 per cent The percentage increase in return on equity for Qatars banking sector during 2014
In terms of profits based on assets, Saudi Arabias Al-Rajhi Bank, the fifth-biggest by assets, was the strongest of the regions largest banks in 2014. Like other lenders, the sharia-compliant Saudi giant has benefited from lower loan loss provisions.
Weve 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 dont expect to see any significant deterioration in asset quality, says Mohamed Damak, global head of Islamic finance at US ratings agency Standard & Poors.
Al-Rajhis 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 Exchanges (Tadawuls) and the regions 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 QNBs double-digit increase.
Saudi banks have been hit by exposures to construction companies that bore the brunt of the governments 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.
Some of the strongest earnings performances came from the UAE pair in the top five, Dubais Emirates NBD and Abu Dhabis Nbad.
The formers 59 per cent increase in net income to $1.4bn was the standout figure in last years 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 Moodys 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.
Nbads 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. Nbads 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 kingdoms 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 Banks 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.
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 GCCs 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.
Moodys 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 Banks financial result, which should have shown a 2.4 per cent rise in assets between 2013 and 2014