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KPMG report: GCC banking sector enters a new paradigm

KPMG report: GCC banking sector enters a new paradigm

KPMG has released its first GCC listed bank results report, analyzing the published financial statements of 56 leading listed commercial banks across Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The report covers over 90 percent of the region’s listed banking assets, and indicates that the regional banking sector has entered a new paradigm where we see margin compression, tightening liquidity, moderate asset and profit growth, limited capital market activity, greater focus on cost reduction and a widespread need for greater capital and funding. However, banks have on the whole, fared well during 2015 and the outlook for the coming years remains relatively positive given the expectation of continued government support for the sector and committed infrastructure investment.

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Jalil Al'Aali

 GCC banking results report analyses results of 56 of the region’s leading listed commercial banks, covering 90 percent of listed banking assets

 Banks remain relatively resilient, and long-term outlook remains positive despite economic uncertainty

 Capital adequacy and liquidity have both fallen across the GCC and remain the largest challenges to the sector

KPMG has released its first GCC listed bank results report, analyzing the published financial statements of 56 leading listed commercial banks across Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The report covers over 90 percent of the region’s listed banking assets, and indicates that the regional banking sector has entered a new paradigm where we see margin compression, tightening liquidity, moderate asset and profit growth, limited capital market activity, greater focus on cost reduction and a widespread need for greater capital and funding. However, banks have on the whole, fared well during 2015 and the outlook for the coming years remains relatively positive given the expectation of continued government support for the sector and committed infrastructure investment.NewsJalil Al Aali, Head of Financial Services in KPMG Bahrain said, “The banking sector in the region has moved a long way from the days of excess capital and liquidity.

Our report reveals that the sector is no longer growing at double-digit growth rates. Banks are experiencing new challenges as a result of the current economic environment, greater regulatory oversight, supervision and stiffer competition. However the sector is still growing, although at a slower pace than previous years.

”Despite the impact of margin compression caused by an increase in the cost of funds and greater competition for assets, both profitability and assets rose across the region (by 6.8 percent and 6.3 percent respectively on simple average). The continued rise in profitability and assets is largely due to the careful planning and the cautious approach adopted by banks. The report suggests that the coming year is likely to see further capital and fundraising activity to support growth and to manage Basel III capital and liquidity requirements, particularly given that capital adequacy and liquidity levels fell in 2015 compared with the previous year.

The report also suggests that consolidation in the form of mergers and/or reorganizations could possibly take place in the near future as a result of stiff competition and increasing pressures on costs.Net impairment charges have declined year on year by an average of 9.2 percent, reflecting the more cautious approach to lending adopted by banks in previous years. This trend may not continue due to a lag from the impact of the oil price decline on the wider economy, and with the implementation of IFRS 9, the new International Financial Reporting Standard, which will prescribe a completely new way of calculating credit losses, which are likely to drive up impairment charges.It is clear that the sector is looking for ways to mitigate current financial pressures as cost-to-income ratios have reduced by 7.4 percent on average since 2014.

Al Aali continued “the reduction in cost-to income-ratios is backed up by an increase in banks looking to acquire consultancy services on cost-reduction, operational efficiency, digitalization and other ways to improve profitability. This early action will help to bolster bank’s resilience moving forward.”NewsIncreasing regulation, despite creating additional pressure on banks, is having a positive impact on the sector – a trend which is expected to continue in the long-term.

Basel III regulations, which are being adopted across the GCC, will continue to improve the sector's resilience against financial and economic stress, improve risk management and governance and strengthen banks' transparency.

Al Aali added that most banks are being forced to adapt to the challenging environment. “we are seeing banks compete more aggressively, focusing more on efficiencies, and seeking innovative ways to grow and deliver positive results whilst managing shareholder expectations. We firmly believe that some of the fundamental changes we are witnessing, whether it be increasing regulatory scrutiny or greater efficiency will help the financial services industry and provide for greater stability in the long-term”.

The report titled “GCC Listed Bank Results: A new paradigm” (available here), analyses the results of selected listed banks in the Kingdom of Bahrain, the State of Kuwait, the Sultanate of Oman, the Kingdom of Saudi Arabia, the State of Qatar and the United Arab Emirates. It summarizes bank’s results against selected key performance indicators for the year ending 31 December 2015 and compares these with the same information for the year ending 31 December 2014.

© 2017 KPMG Fakhro, a Bahrain partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss entity. All rights reserved.

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