The GCC banking sector is an important segment of GCC financial sector. From a modest asset base of $314b as of end of 2003, the total assets for the sector grew to an astonishing $ 966 b by the end of 2009, implying an annual growth of 20%. The banking sector is dominated by domestic players due to regulatory protection. The sector enjoys a large market opportunity set primarily due to absence of non-bank finance companies. Hence, one can find banks actively pursuing asset management, investment banking, stock broking ,etc. GCC banking sector is inherently helped by certain fundamental advantages like benign demographics that is not only young but also wealthy. The region is still under penetrated when benchmarked with western banks. While the sector cruised along nicely all these years, a major brake occurred during the fourth quarter of 2008, after which the sector continued to witness tremendous challenges.
Asset quality deterioration has led to unprecedented levels of provisioning during the last two years which dented the profitability, especially that of Islamic banks. Exposure to troubled sectors (like real estate, construction and financial services) coupled with bad corporate governance can stand as main reasons. While the sector was hit by the global financial crisis, the general assessment is that it has shown more resilience than expected. As per IMF assessment, regional banks withstood the onslaught better due to their low exposure to structured products and derivatives (both on and off balance sheet). On an average, banks in GCC held 18% of their portfolios in securities as of end-2008 of which exposure to equities/derivatives is just 1%. Also, regional banks enjoyed high capital and profit leading to larger buffers. In addition, timely help from central banks reduced the impact.
However, looking forward, the days of easy money (through high spreads) are gone with high level of risk aversion setting in among banks. This will lead to lower credit growth. While credit grew by an astonishing 30% during the last few years, it will be prudent to assume that this rate will atleast halve going forward. With other avenues for capital deployment being weak, deposit growth will continue to be strong adding further pressure. The potential for fee income has also reduced. Ambition to foray beyond borders will also be reviewed in this challenging time.
GCC banks were laid back in the past in a protected environment leading to poor customer service and product offering. On an average, the ratio of product-per-customer ratio is two to three in the GCC compared to eight or nine in the western retail banks as per AT Kearney study. The banking sector faces large competition with limited potential in the domestic market and the gradual relaxation of regulatory restrictions. Most banks operated within their country of operations and had limited branch network thereby keeping a control on infrastructure costs. Also, through expat hiring banks kept its costs low even in areas like information technology. All this enabled GCC banks to enjoy a low cost-to-income ratio compared to other banks in the western world. Also, GCC banks enjoyed high capital cover and a stable shareholder base which in some countries could be the respective government providing cheap and stable capital and deposits. But going forward, GCC banks may have to face some change in paradigm leading to vanishing of these advantages. The WTO would bring in more pressure for the local regulators to allow entry of foreign banks. Also, post financial crisis, regulators will lay more emphasis on encouraging the development of local capital markets as depending only on the banking sector could be dangerous. This is likely to reduce the overall dependence and importance of banks as the main financial intermediary.Click here for the original article
