Font Size
Share this article

Print Friendly Version
07 January 2020

Better operating conditions

The regional banking sector has been severely tested but thanks to their respective governments’ support, the banks successfully withered the storm.

Growth in banking assets is highly correlated with that of regional GDP/iStock

by Kudakwashe Muzoriwa

Financial markets across the globe have taken a battering in the past couple of years, with the Arabian Gulf region experiencing its fair share of difficulties.

The regional banking sector has been severely tested but thanks to their respective governments’ support, the banks successfully weathered the storm. According to Moody’s, the outlook for GCC banks remains stable, underpinned by solid economic growth and by the lenders’ strong capital buffers and substantial liquidity.

GCC lenders are coming up with ways to resist geopolitical tensions, faltering real estate industry and volatile oil prices through partnerships with fintechs as well as mergers and acquisitions (M&A) to improve competitiveness and boost capital.

The GCC banking sector is also benefitting from the regional equity market which has seen an increase of initial public offerings by major companies like Saudi Aramco as well as an active debt market, witnessing iconic transactions as governments and corporates seek to diversify their sources of finance.

“Government spending programmes will push average non-hydrocarbon GDP growth to 2.6 per cent in 2020, providing favourable operating conditions for the region’s banks,” said Moody’s.

The GCC region will be in focus in 2020 because of several major global events such as Expo 2020 Dubai, which opens on 20 October 2020 and runs for nearly six months and the G20 Summit in Riyadh in November 2020.

PwC stated that in different ways, the Expo 2020 Dubai and G20 Summit will showcase the region’s economic development as well as potential and could contribute to ongoing efforts to attract investments and diversify economies.


In a research note, Fitch Ratings stated that GCC banks will successfully navigate a less-than-favourable macroeconomic environment in 2020 supported by their solid financial profiles.

Banks took the opportunity of the transition to International Financial Reporting Standards (IFRS) 9 in 2018 to recognise the effect of the softer economic cycle on their asset quality indicators in a relatively conservative manner.

“The amount of problematic assets, which we define as IFRS 9 Stage 2 and 3 loans, will likely remain stable, but we do not exclude transition between the two categories,” said S&P. Loan performance will weaken modestly but will remain solid.

However new problem loans are expected to form primarily in the slowing construction and real-estate sector. Moody’s expects non-performing loans (NPLs) to stand at a moderate 3.5 per cent of total loans by the end of 2020, from an estimated 3.3 per cent in 2019.

Surprisingly, the muted economic activity of the past four years did not result in a significant increase in nonperforming loans in the region. According to S&P Global, as of 30 June 2019, NPLs to total loans for the rated GCC banks reached 2.8 per cent, compared with 2.4 per cent at year-end 2015.

A combination of write-offs, restructuring of exposures to adapt to the new economic reality, and tighter underwriting standards explain this stability. S&P Global stated that the other source of latent risk is Gulf banks’ international operations.

Several GCC banks such as Bahrain’s Al Baraka Bank, Kuwait Financial House and UAE’s Emirates NBD have invested internationally over the past few years, with Turkey among the most popular destinations.

Given Turkey’s lacklustre economic performance, exposed GCC banks will see some effect on their asset quality indicators, however, this risk remains confined to only a few players, some of which have the financial muscle to absorb it, said Fitch Ratings.

However, growth in banking assets is highly correlated with that of regional GDP, which moves largely in tandem with oil prices although governments are diversifying their economies to do away with reliance on hydrocarbons.

Moody’s expects real GDP growth to average two per cent across the region in 2020. The relatively stable oil price has helped lift the outlook of GCC banks in 2019, compared to their counterparts in other emerging markets such as Turkey and Lebanon, who have been struggling amid slowing economic growth with some even facing rating downgrades.

Oil remains the dominant driver of growth in the GCC states which, given low-trending prices and ongoing output caps, will limit the upside for recovery in the year ahead, said ICAEW.

The Organisation of Petroleum Exporting Countries and their allies (OPEC+) agreed to adjust its output target and redistribute production cuts between its members under pressure from Saudi Arabia, which has long carried an outsized share of the burden.

Moody’s forecasted an average oil price of $62 for 2020, around the midpoint of the rating agency’s $50-$70 medium-term projection range, balanced by sluggish global demand and subsequent supply cuts led by OPEC and Russia.

Since 2014, the GCC countries have been hit by a sustained period of low crude prices, which has caused governments to re-calibrate budgets and dip into state deposits. Banks have also faced pressure from higher compliance costs because of new accounting standards, technological changes and the introduction of value-added tax.


According to S&P Global Ratings, consolidation is an avenue that some Gulf banks have decided to take, although the first wave of mergers was driven by banks with common shareholders, the second wave could be due to lower financial performance.

The overcrowded banking sector in the GCC has seen a wave of mergers and acquisitions announcements in the last year, as falling oil prices hit government budgets, slowing economic growth.

The sector has many banks serving small populations, driving intense competition and aggressive pricing policies. Moody’s said that Oman, where two potential mergers have been announced, has 20 licenced banks serving a population of 4.6 million people while Saudi Arabia has only 27 banks serving a population of close to 33 million people.

The Abu Dhabi government completed the merger of Abu Dhabi Commercial Bank, United National Bank and Al Hilal Bank in June 2019 following the successful tie-up of its two major banks to become First Abu Dhabi Bank in 2017.

Recently, Dubai Islamic Bank’s (DIB) shareholders approved the acquisition of Noor Bank through an increase of DIB’s capital from 6.6 billion shares to 7.2 billion shares, with a share swap ratio of one new share in DIB for every 5.49 Noor Bank shares, translating into an issuance of about 651 million new DIB shares.

Dubai’s Emirates NBD also completed the acquisition of Russia-based Sberbank’s 99.85 per cent stake in Turkey’s Denizbank for $2.8 billion (TRL 15.48 billion) in August 2019, strengthening UAE’s financial powerhouse’s regional presence.

Additionally, the shareholders of Invest Bank also approved an investment proposal allowing the Government of Sharjah to own 50.07 per cent of the lender following AED 1.12 billion strategic investment last year.

Banks in the GCC continue to display strong capitalisation by global standards and over the past year we have affirmed most of our ratings taking a couple of positive actions because of upcoming mergers or our view of higher systemic importance, said S&P Global.

Across the region, the Central Bank of Kuwait ‘conditionally’ approved the proposed merger between Kuwait Financial House (KFH) and Bahrain’s Ahli United Bank (AUB). CBK granted KFH permission to acquire 100 per cent of the capital shares of AUB and the approval shall be conditional upon fulfilling certain requirements by the central bank.

Moody’s said that the outlook for GCC banks remains stable, except Oman, underpinned by solid economic growth as well as the banks’ strong capital buffers and substantial liquidity. Additionally, Saudi British Bank (SABB) and Alawwal agreed to merge their businesses in June 2019, after receiving regulatory and shareholder approvals, creating the third-largest bank by assets in the Kingdom.

In Bahrain, the National Bank of Bahrain, which owns a 29 per cent stake in Bahrain Islamic Bank, made an offer to acquire the entire Islamic lender in November 2019 following months of discussions as well as financial and legal due diligence for a potential offer for the Shari’ah-compliant lender’s issued shares.

Furthermore, the Sultanate’s Alizz Islamic Bank and Oman Arab Bank (OAB) signed an MoU to explore the possibilities of a potential merger after obtaining the in-principal approval from the regulatory bodies in 2018.

The two lenders also appointed legal and financial advisors to conduct due diligence, paving way for the proposed merger. Although GCC countries are diversifying their economies to reduce dependence on oil and gas exports, hydrocarbon revenues contribute greatly to their fiscal revenues and annual budget.

The sharp drop in oil prices in Q4 2018 highlights the vulnerability of GCC sovereigns’ credit profiles to future oil price declines which will inevitably impact the capital base of banks. Should prices stay near $60, Oman’s budget deficits would be materially wider and debt likely higher.

RELATED STORIES: Financial markets GCC banks oil price NPLs M&A G20 Summit Expo 2020 Dubai IFRS 9 Al Baraka Bank Kuwait Financial House Emirates NBD




CPI Financial was established in Dubai in 1999 to meet the needs of an ever-expanding financial community, offering a comprehensive portfolio of market-leading products and services tailor-made for the banking and financial services sectors.

Subscribe to our News Letter


© 2019 CPI Financial. All rights reserved.

No part of this website may be reproduced or used in any form of advertising without prior permission in writing from the editor.