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Analysis of the GCC banking sector performed by QNB Group concludes that its prospects are stable, banks are expected to be remain profitable and that the sector itself has room for growth.

Total assets in the sector rose by 8.9% in 2011 to US$1.46trn, equivalent to 106% of regional GDP. By comparison, assets in the UK equal 341% of its GDP. This suggests that there is still plenty of room for GCC assets to grow in relative terms.

GCC banking assets have been growing strongly in recent years, except for a slow period in 2009, at a compound annual growth rate of 7.5% from 2007-11. This growth in banking assets is a consequence of the region’s economic boom, driven by high oil prices.

The UAE has the largest share of regional assets, 31% of the total. Saudi Arabia’s banking sector is in second place, with 28% of GCC assets, but it is the smallest in relative terms, at around 71% of GDP.

Part of the reason why Saudi assets are smaller in relative terms is the importance of its specialized non-bank credit institutions, such as the Public Investment Fund. These fulfil typical financing and lending functions and their combined assets that are close to half those of the formal Saudi banking sector.

Qatar’s banking sector, meanwhile, saw the most rapid increase in assets during 2011, growing by 22.3%. It looks set to move ahead of Bahrain (an offshore financing hub) to take third place in the region by asset size, having previously overtaken Kuwait in 2010.

Domestic banks hold the majority of assets in each country, with the exception of Bahrain where foreign banks hold 57%. For the region as a whole, 83% of assets are held by domestic banks in their home countries.

Loans as a share of GDP in the GCC rose to 56% in 2011, but this is low compared to countries like the UK where loans are 153% of GDP. This largely explains the GCC’s fairly low share of overall banking assets relative to GDP. There is therefore space for an increase in the loan penetration rates in the GCC.

The UAE has the highest level of domestic loan penetration, 78% of GDP, primarily as a result of extensive lending to the real estate sector. Saudi Arabia has the lowest, at 40% of GDP, but this may increase when a long-awaited law reforming mortgage financing is implemented and boosts access to credit.
The asset quality of the GCC banking sector is generally good and has been improving in those places that experienced some credit problems following the 2008 financial crisis. The regional non-performing loan (NPL) ratio was 4.6%, at end-2010, the most recent year with data for the whole region. It ranged from a low of 2.0% in Qatar to a high of 8.9% in Kuwait, based on IMF data.

In addition to this, GCC regulators have encouraged banks in recent years to adopt more conservative provisioning policies for NPLs. This has helped to clean up their balance sheets and has improved coverage ratios.

According to the IIF, provisioning coverage ratios ranged from 60% for Bahrain to 115% for Saudi Arabia in July 2011. This means that the regional coverage ratio was high at about 84%.

The Basel II framework of international banking standards has been applied across the GCC, and capital adequacy ratios are well above the recommended minimum level of 8%. At the end of 2010 they ranged from 12% in Bahrain to 21.8% in UAE.

In Qatar, where data is available for end-2011, the capital adequacy ratio rose to 20.6%, from 16.1% a year before.

In terms of profitability, the combined net profit of the ten top GCC banks increased by 18.1% in 2011, to US$12.3bn. QNB Group led the pack, with profit growth of 32% to US$2.1bn.

The GCC’s banking sector is in a good position to support the ongoing development of the region. Strong GDP growth, which QNB Group forecasts will average 4.6% in real terms for the GCC in 2012-13, will increase the demand for bank financing across the economy. As a result, regional banking assets are expected to continue to grow strongly. At the same time, conservative banking policies will ensure that the banks remain stable through this period of growth.

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