Oil price crash hits banks badly

|By Arabian Post Staff|The impact of the massive decline in oil prices has finally reached the door steps of the banking industry and some banks have been affected more than the others.

According to a new study by The Boston Consulting Group (BCG), the banking industry in the GCC grew at a lower rate in 2015 than it did in 2014 with just a 7.2 percent increase, stemming almost exclusively from major customer segments such as retail and corporate banking.

The study is based on the banks’ 2015 annual results released in the first quarter of 2016 and covers the largest banks in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and in the UAE. The 2015 BCG index includes 45 banks from across the GCC, capturing about 80 percent of the total regional banking sector.

In 2015, Oman banks led the pack in terms of growth numbers with 9.6 percent in revenues and 10.5 percent in profits. In parallel, UAE banks’ revenues grew by 8.1 percent and Kuwait banks recorded a 11.4 percent profit growth. The spread of revenue and profit growth rates between the GCC countries was significantly smaller than that of last year, ranging from four to 11 percent. There was no negative growth on a country level.

Instead, in 2015, the development of loan-loss provisions (LLPs) varied significantly between the countries, resulting in total, in a small increase of 0.6 percent. The two biggest countries, the UAE and Saudi Arabia, ended up with a small increase of two percent and 4.8 percent, respectively. Whereas Bahrain banks grew LLPs by 39 percent and Oman banks by 21 percent.

This is compensated across the GCC by a strong decline in Qatar and Kuwait. In 2014, we had observed a decline in LLP across almost all countries. Going forward, a slight increase can be expected due to current trends in economic development. A first sign of this is that the majority of banks in the UAE provisioned more in 2015 than they did the year before.

After a number of years with growth in operating expenses exceeding that of revenues, 2015 came out with a moderate aggregate cost growth of 6 percent, with Qatar and Kuwait banks managing almost zero and Bahrain recording a negative growth in cost of one percent. A number of banks preempted the consequences of a low oil price environment and restricted costs and investments. Some larger banks as well as those that had significantly increased costs in the past, managed to achieve low and, in several cases, even negative growth.

Revenues

In 2015, retail banking revenues in the GCC experienced a further uptick of 8.1 percent, largely due to an increase in Qatar (16 percent), Oman (11 percent) and the UAE (10 percent).

GCC retail profits faced a decline in aggregate, largely because of a negative growth in the UAE. The growth rate in all the other countries was moderate; in fact, only banks in Qatar reached a double-digit growth rate with 13 percent.

In 2015, only Oman experienced double-digit growth rates in both corporate revenues and profits. In the UAE, however, there was a slight decline in revenues while profits grew by 22 percent due to a decline in provisions. All the other countries realized moderate revenue growth. Profit growth numbers, on the other hand, range from minus one percent in Saudi Arabia to 18 percent in Kuwait.

Over the past decade, the leading banks have grown at double or triple the rate of the average ones. In almost all cases, such a development is based on a superior and consistently-executed strategy.