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
2014 133,614 87,100 101,400 2,970
2013 125,926 88,943 94,911 2,684
2012 104,377 72,386 76,912 2,327
2011 82,909 53,282 54,930 2,062
2010 61,336 36,162 38,466 1,566
National Commercial Bank
2014 115,967 58,859 88,818 2,344
2013 100,602 50,046 80,156 2,130
2012 92,064 43,584 72,924 1,720
2011 80,314 36,075 63,851 1,628
2010 75,306 33,496 61,115 1,281
National Bank of Abu Dhabi
2014 102,409 52,899 66,212 1,516
2013 98,353 50,584 76,418 1,288
2012 87,670 45,961 66,582 1,280
2011 69,605 43,429 41,332 1,009
2010 57,519 37,252 33,521 1,003
Emirates NBD
2014 98,848 66,975 70,324 1,399
2013 94,484 71,871 68,483 942
2012 85,967 65,287 60,706 749
2011 77,485 47,915 52,630 689
2010 77,916 53,658 54,448 637
Al-Rajhi Bank
2014 82,056 54,914 68,268 1,823
2013 76,795 59,143 64,258 1,891
2012 73,491 44,137 62,266 2,113
2011 58,879 37,436 46,245 1,967
2010 49,286 32,020 38,155 1,805
National Bank of Kuwait
2014 74,399 40,700 38,500 894
2013 72,957 38,984 40,838 857
2012 57,553 36,113 33,316 1,069
2011 48,894 29,191 24,396 1,085
2010 45,845 28,657 23,300 1,072
Kuwait Finance House 
2014 58,681 57,423 47,192 417
2013 57,437 31,951 35,964 412
2012 47,165 27,631 31,198 282
2011 48,295 26,360 31,885 288
2010 44,800 na 27,259 379
Samba Financial Group
2014 57,973 32,049 43,605* 1,334
2013 55,661 30,825 44,699 1,224
2012 53,541 28,411 42,955 1,158
2011 51,402 23,761 36,599 1,147
2010 49,956 21,402 35,593 1,182
First Gulf Bank
2014 57,772 38,032 38,467 1,540
2013 52,513 33,597 37,539 1,377
2012 47,087 32,072 34,384 1,161
2011 42,874 28,585 28,171 1,009
2010 38,331 26,035 26,883 931
Riyad Bank
2014 57,223 35,959 43,751 1,160
2013 56,364 42,645 36,465 1,087
2012 49,716 39,696 32,930 937
2011 48,233 37,283 30,124 840
2010 45,791 33,856 28,279 753
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