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Top Ten GCC Banks

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Top Ten GCC Banks

  1. 1.   Weekly  Commentary   QNB  Economics   economics@qnb.com.qa   1  September  2013   Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.   J un-­‐13 J un-­‐12 Chg. QNB Qatar 118                 91                   30% National  Commercial  Bank Saudi   97                     85                   13% Emirates  NBD UAE 91                     81                   12% National  Banko  of  Abu  Dhabi UAE 89                     74                   21% Al  Rajhi  Bank Saudi   73                     64                   15% National  Bank  of  Kuwait Kuwait 63                     51                   23% Kuwait  Finance  House Kuwait 56                     50                   12% Samba Saudi   55                     53                   3% Riyad  Bank Saudi   51                     48                   6% First  Gulf  Bank UAE 50                     44                   12% Total 743                 641               16% Top  Ten  GCC  Banks  Have  Demonstrated  Strong  Growth   And   Are   Well   Insulated   From   The   Turmoil   Facing   Emerging   Markets,   According  to  QNB  Group   The   top   ten   GCC   banks   are   among   the   fastest   growing   globally,   led   by   QNB   Group.   They   are   likely   to   remain   well   insulated   from   the   current   turmoil  in  emerging  markets  (EM)  as  their  growth   momentum   is   underpinned   by   strong   economic   fundamentals   in   the   region:   high   revenue   from   hydrocarbon   exports;   positive   net   foreign   asset   positions;  strong  support  for  the  banking  system;   and  large  government  spending  on  infrastructure.     The  growth  in  assets  of  GCC  banks  remains  strong,   notwithstanding   the   current   EM   crisis.   Overall,   assets   of   the   top   ten   GCC   banks   grew   by   16%   in   twelve   months   to   end–June   2013   (Table   1)   to   reach   USD743bn.   This   growth   was   driven   by   strong   oil   prices   and   high   non-­‐oil   economic   activity.  At  the  same  time,  large-­‐scale  government   spending   on   major   projects   across   the   region,   particularly   in   Qatar   and   Saudi   Arabia,   created   significant  banking  opportunities.     EM   banks   outside   the   GCC   are   facing   a   period   of   turmoil.   The   expected   tapering   of   Quantitative   Easing   (QE)   in   the   US   has   tightened   global   liquidity.  Cheap  capital  that  had  previously  flown   into  emerging  markets  is  now  reversing  its  course,   leading   to   sharp   exchange   rate   depreciations,   higher   interest   rates,   and   stock   market   corrections.  This  is  having  a  negative  impact  on  all   aspects  of  EM  banking  sectors.     Table  1.  Top  Ten  GCC  Banks  by  Assets   (USD  bn  and  %  change  shown)        Source:  Bloomberg  and  QNB  Group  analysis   GCC   banks,   however,   have   largely   escaped   this   global   liquidity   crunch   as   the   region   has   only   limited   dependency   on   foreign   capital   for   its   funding.  Strong  hydrocarbon  revenue  and  surplus   foreign  assets  built  up  by  GCC  authorities  provide   ample   resources   for   continued   government   spending  on  infrastructure  and  guarantee  ongoing   systemic   support   for   the   banking   system.   This   improves  the  operating  environment  and  outlook   for   the   banking   sector   and   helps   insulate   the   region  from  the  EM  crisis.     According   to   QNB,   the   leading   GCC   banks   are   therefore   likely   to   continue   their   strong   performance   in   2013   and   beyond.   Furthermore,   the   largest   GCC   banks   comfortably   meet   capital   requirements   (the   average   Tier   1   Capital   ratio   amongst   the   top   ten   GCC   banks   is   16%);   have   strong   asset   quality   (the   average   ratio   of   non-­‐ performing   loans   (NPLs)   to   total   loans   is   1.9%   excluding  Emirates  NBD,  which  has  NPLs  of  14%);   and   robust   profit   growth   (average   profit   growth   was  16%  in  the  year  to  end-­‐June  2013).  According   to   QNB   Group,   this   adds   further   comfort   to   the   view   that   the   top   GCC   banks   are   well   insulated   against   the   EM   turmoil   that   is   currently   captivating  global  financial  markets.  
  2. 2.   Weekly  Commentary   QNB  Economics   economics@qnb.com.qa   1  September  2013   Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.   QNB  Group,  the  largest  GCC  bank  by  assets,  is  the   only   Qatari   bank   in   the   top   ten   list   and   was   the   fastest   growing   bank   with   total   assets   expanding   by  30%  in  the  12  months  to  end-­‐June  2013.  This   asset   growth   was   driven   by   the   strategic   acquisition   of   NSGB   in   Egypt,   and   higher   international   stakes.   At   the   end   of   2012,   79%   of   QNB’s   assets   were   in   Qatar.   Therefore,   strong   growth  in  Qatar’s  economy  (forecast  to  be  6.5%  in   2013)  has  also  supported  growth  in  QNB  Group’s   assets.   Growth   is   expected   to   accelerate   as   the   government   rolls   out   its   large   infrastructure   investment  program  in  time  to  meet  requirements   for  the  2022  World  Cup.  With  a  strong  net  foreign   asset   position   (high   and   rising   international   reserves   and   a   large   sovereign   wealth   fund)   and   high  hydrocarbon  revenue,  Qatar  is  well  insulated   from   capital   flight   risks   faced   by   other   emerging   markets.  This  will  enable  it  to  comfortably  roll  out   its   infrastructure   development   plan,   supporting   the  economy  and  the  banking  sector.     Qatar’s   economic   growth   and   project   pipeline   presents   major   opportunities   for   QNB   and   the   wider  banking  sector  to  boost  growth  of  domestic   credit  and  investment  as  well  as  profits.  Profits  of   Qatari  banks  are  rising  along  with  assets;  reaching   USD2.4bn  in  the  first  half  of  2013,  9%  higher  than   the   same   period   in   2012.   This   equates   to   high   returns   of   2.4%   on   average   assets   and   15.2%   on   average  equity.  This  is  being  achieved  while  asset   quality   remains   high   across   the   banking   sector:   NPLs   were   as   low   as   1.7%   of   total   loans   at   end-­‐ 2012.   They   have   been   kept   down   by   strong   government   support:   the   government   stepped   in   to   purchase   bad   real   estate   loans   and   equity   portfolios   from   banks   in   the   aftermath   of   the   2008-­‐09   financial   crisis.   Additionally,   banks   are   well  capitalized  with  Tier  1  capital  at  18%  of  risk   weighted  assets  at  end-­‐2012.   A   total   of   4   of   the   banks   in   the   GCC   top   ten   are   from   Saudi   Arabia.   Assets   at   these   banks   have   grown   10%   in   the   12   months   to   end-­‐June   2013.   This  was  driven  by  both  corporate  and  retail  loan   growth.  On  the  corporate  side,  high  oil  production   and   prices   has   boosted   revenue,   supporting   government   spending   on   major   infrastructure   projects.   More   recently,   USD22bn   of   contracts   were  awarded  in  July  for  the  Riyadh  Metro.  Such   projects   have   provided   banks   with   considerable   financing   opportunities,   driving   asset   growth.   Retail  loan  growth  has  been  propelled  by  the  new   and   fast-­‐growing   mortgage   loan   sector.   The   current   program   of   project   spending   totals   USD500bn,   including   large-­‐scale   housing   construction,   which   will   continue   to   support   lending,   mortgages   and   asset   growth   going   forward.   Again,   hydrocarbon   revenue   and   an   extremely   strong   net   foreign   asset   position   provide  ample  resources  for  the  Saudi  authorities   to   meet   spending   plans,   supporting   the   economy   and  the  banking  sector.     Further   insulating   the   banking   sector,   the   top   Saudi  banks  are  highly  capitalized  (average  Tier  1   capital  ratio  of  17%)  with  low  NPLs  (1.5%  of  total   loans   on   average)   and   strong   profit   growth   (8.2%).  The  low  interest  rate  environment,  strong   competition  and  high  liquidity  has  compressed  net   interest   margins.   However,   non-­‐interest   income   has   supported   profit   growth,   such   as   fee   income   from  credit  expansion,  off-­‐balance-­‐sheet  items  and   a  surge  in  trading  on  the  Tadawul  stock  exchange.     The  3  UAE  banks  in  the  GCC  top  ten  witnessed  a   sharp   pickup   in   activity   over   the   last   year,   especially  in  the  real  estate  and  services  sector  in   Dubai.   Profits   at   the   largest   UAE   bank,   Emirates   NBD   (Dubai),   grew   40%   in   the   first   half   of   2013   compared   with   the   first   half   of   2012.   However,   return   on   average   equity   remains   low   (8.2%)   as   the   bank   continues   to   suffer   from   high   NPLs   (14%),  the  legacy  of  Dubai’s  real  estate  debt  crisis   in  2009.  A  number  of  the  other  banks  in  Dubai  face   similar   issues   to   Emirates   NBD.   At   the   end   of   2012,  Moody’s  downgraded  4  Dubai-­‐based  banks   (Emirates   NBD,   Mashreqbank,   Commercial   Bank   of   Dubai   and   Dubai   Islamic   Bank)   owing   to   elevated   NPLs   (15%-­‐17%)   and   low   provisioning   for  bad  loans,  despite  improvements  in  the  Dubai   operating   environment.   The   largest   Abu   Dhabi-­‐ based  banks,  National  Bank  of  Abu  Dhabi  and  First   Gulf   Bank,   have   already   returned   to   high  
  3. 3.   Weekly  Commentary   QNB  Economics   economics@qnb.com.qa   1  September  2013   Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be reproduced in whole or in part without permission from QNB Group.   profitability   (return   on   average   equity   around   16%)  as  they  were  less  exposed  to  the  crash  in  the   Dubai   real   estate   market   and   benefited   from   stronger   state   support.   The   UAE   banking   system   has   a   strong   track   record   of   systemic   support,   most  recently  during  the  last  financial  crisis  when   liquidity   and   capital   facilities   were   provided   to   distressed   banks.   Such   implicit   guarantees   help   protect   the   banking   system   from   capital   flight   risks.   The   2   Kuwaiti   banks   in   the   top   ten   list   have   performed   strongly   with   asset   growth   of   17%   in   the  12  months  to  end-­‐June  2013.  The  asset  growth   was   mainly   driven   by   National   Bank   of   Kuwait.   Corporate   lending   has   accelerated   as   the   government’s   USD110bn   development   plan   has   gathered  pace.  However,  in  Kuwait,  consumer  loan   growth   has   been   particularly   strong,   driven   by   public   sector   wage   increases   and   transfers.   Oil   revenue   and   a   strong   net   foreign   asset   position   should  ensure  continued  support  to  the  economy   and   banking   sector   in   Kuwait,   mainly   through   government   wages   and   transfers   and   to   a   lesser   extent   on   government   spending.   The   ongoing   deleveraging  in  nonbank  financial  institutions  will   continue   to   hold   back   growth   in   the   banking   sector  as  credit  to  these  institutions  shrinks.   Overall,  the  GCC  provides  a  strong  macroeconomic   operating   environment   for   the   banking   sector   to   flourish.   High   hydrocarbon   prices   support   revenue  streams  for  project  spending  and  surplus   foreign   assets.   This   should   continue   to   support   lending   and   asset   growth   for   the   top   GCC   banks,   according  to  QNB  Group,  and  is  likely  to  keep  the   GCC  well  insulated  from  the  turmoil  gripping  EM   banking  sectors.                

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