GCC banks expand globally and digitally
Saturday, 11 09 2019, Category: Banking, Country: Gulf Cooperation Council
According to the World Bank, growth across the Gulf region is expected to increase from two per cent last year to 2.1 per cent in 2019, before accelerating to 3.2 per cent in 2020 owing to the ongoing reforms which are meant to improve the business environment in the region.
The GCC, home to some of the fastest-growing economies in the emerging markets, is seeing increased investment in the financial sector as banks seek to diversify their risk profiles and strengthen capital generation through earnings.
Additionally, banks across the region are also increasing their international foray, reducing a glut of banks through a wave of synergies as well as digitalising of their products and services to enhance customer experience. However, banks in the Middle East do not operate independently of their environments which pose severe threats to their businesses.
S&P Global expects GCC economies to show modestly stronger economic growth in 2020 after a dip this year following an aerial strike on some of the Kingdom’s largest oil facilities in September 2019. The drone attack on the Abqaiq processing plant and Khurais field temporarily reduced production by more than half.
The growth in GCC countries will remain below than what was seen during the era of triple-digit oil prices, says the IMF. Growth is also likely to be constrained by a broader global slowdown, regional geopolitical tensions and diplomacy fallouts as well as the ongoing US-China trade tension and the slump in global oil prices.
S&P expects net lending expansion to remain flat in the mid- single digits on average and the cost of risk to stabilise at around one per cent of total loans, due to the stronger buffer of provisions that GCC banks accumulated over the past few years and linked to International Financial Reporting Standards (IFRS 9).
Banks took the opportunity of the transition to IFRS 9 in 2018 to recognise the effect of the softer economic cycle on their asset quality indicators in a relatively conservative manner, therefore, the amount of problematic assets, which is defined as IFRS9 Stage 2 and 3 loans is expected to remain stable.
S&P said that GCC banks’ profitability will deteriorate slightly or stabilise at best. Regional lenders’ profits will likely be affected by the shift in global monetary policy toward lower interest rates for longer.
The Central Bank of the UAE and the Saudi Arabia Monetary Authority reduced their interest rates by a quarter percentage point after the Federal Reserve policymakers lowered their main interest rate for a second time in 2019 saying the move should be sufficient to sustain the US expansion. The Saudi riyal and the UAE’s dirham are pegged to the US dollar and the central banks in the respective countries follow the US Federal Reserve on interest rate moves.
The global monetary policy trends have already triggered a closer look from GCC banks’ management toward operating costs, including through higher digitalisation and collaboration with fintech firms.
GCC banks are increasingly digitising their products and services as well as experimenting, invest and integrate with fintechs. Banks are leading or participating in several accelerators, incubators and training programmes to get early access to technology and talent.