Provisions to moderate as SME defaults ease
The loan-loss provisions (LLPs) of GCC banks catapulted last year but varied significantly in different countries. Loan impairments are likely to decline this year as the impact from defaults by small-to-medium-sized enterprises (SMEs) is seen coming down this year.
Qatar had the highest increase in LLPs last year, at 140.2 per cent, followed by Saudi Arabia with 39.9 per cent. Kuwaiti banks on the other hand reduced provisions by 17.3 per cent.
“While in last year’s banking index report, we had expected increasing provisions in 2016, the magnitude of the increase exceeded expectations. From this year we expect a moderation in LLPs,” said Dr Reinhold Leichtfuss, senior partner and managing director at BCG’s Middle East office.
The overall operating expenses of GCC banks grew by 6.3 per cent — higher than the previous year but significantly below the long-term compounded average growth rate (CAGR) of about 12 per cent.
All other countries managed to remain below or close to their revenue growth while Kuwaiti lenders managed to reduce overall costs. In Qatar, costs were higher than the GCC average and was largely linked to overseas acquisitions and integration.
Bigger lenders wield the advantage
The BCG study shows that the magnitude of slowdown in revenue growth in last three years was relatively lower compared to over a longer period.
GCC banks experienced a halving of the long-term growth rates — with the exception of Saudi lenders.
Looking at the revenue and profitability trends, Leichtfuss said relatively larger banks in their respective markets are likely to do better than their smaller counterparts.
“According to BCG’s analysis, it is obvious that banks with superior strategies and strong business models can truly execute decisively and grow the strongest. Leaders still managed to achieve revenue and profit growth, however some of the fast runners of the past have slowed down,” he said.
Going forward, banks’ capability to invest in digital strategies and technology will be decisive in reaping cost advantages and retaining customers — something that will be decisive in revenue and profitability growth.
“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 consistentlyexecuted strategy,” said Dr Leichtfuss.