The Boston Consulting Group’s (BCG) annual banking index, released last month, revealed that the GCC banking industry grew in 2017 at 2.3 percent, lower than in 2016. Growth stemmed almost exclusively from retail and corporate banking. While, there was a significant decline in revenue growth,the upside was that banks were still able to grow profits with a rate more than twice as high as revenues and also that loan loss provisions (LLPs) were reduced. Moreover, most banks managed to reduce their operating expenses, leading to a cost reduction of 1 percent on aggregate for the large GCC banks.

Based on 2017 annual results released in the first quarter of 2018, the latest study is part of BCG’s annual banking performance indices, which measure the development of banking revenues (operating income) and profits. The index covers 44 banks from Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the UAE representing about 80 percent of the total regional banking sector.

The report notes that while international banks saw strong top line growth close to 5 percent and an even stronger recovery in profits they nevertheless remained far behind GCC banks regarding the index level. In 2017, Kuwait banks led in terms of growth with 6.6 percent in revenues and 15 percent in profits. While in 2016 many banks across the GCC experienced a negative development in profits, in 2017, the vast majority of banks, except for banks in Oman, grew profits stronger than revenues. “This is a pattern we have been seeing in more mature banking markets, such as in Europe or the US, for a number of years,” said Peter Vayanos, head of the financial institutions practice for BCG Middle East.Dr. Reinhold Leichtfuss, Senior Partner & Managing Director at BCG’s Middle East office noted that the two largest GCC markets, UAE and Saudi Arabia, were closer to the aver- age, with UAE still close to zero revenue growth for the second year in a row. “The positive message is the healthy profit growth of UAE banks, at 4.6 percent,” said Dr. Leichtfuss. “The revenue growth stagnation stems from a tighter risk appetite as well as portfolio optimisation initiatives of banks which seek to enhance risk-adjusted returns.”

As for loan loss provisions 2017 showed a healthy improvement of 2.7 percent in contrast to 2016 when LLPs catapulted upwards. UAE and Oman experienced the strongest declines of 8.4 and 16.5 percent respectively, followed by Saudi Arabia with 6.5 percent. Moreover, operating expenses were well controlled in the GCC countries. Even UAE banks reduced this figure by 2.7 percent in total, led by the country’s largest banks, and Qatar banks by 6 percent while Saudi Arabia banks managed to keep costs constant. All countries remained significantly below the long-term cost CAGR of 11 percent.

Retail banking growth showed strongly diverging trends across the GCC countries with an average of 3 percent revenue growth and 14 percent profit growth. Retail banking in Saudi Arabia grew revenues by 7 percent and profits by 24 percent, while UAE banks saw a decline in retail revenues by 2 percent but a profit growth of 15 percent. Qatar banks achieved a revenue growth of 12 percent but experienced a sharp profit decline of 22 percent. Bahrain banks had to accept a decline of 3 percent in both retail revenues and retail profits.

In terms of corporate banking,Saudi Arabia and Qatar saw strong growth of around 7 to 8 percent and also achieved good profit growth. UAE banks again saw stronger growth in profits than in revenues. Banks in Kuwait experienced a significant drop in profits owing to strong increases in loan loss provisions.

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