Banking Sector: Bright Outlook Across Region

BMI View: The GCC will remain the outperformer across MENA's banking sector over the coming years, though growth rates will slow as the effects of government stimulus wear off. Elsewhere, we are forecasting an uptick in banking sector assets on the back of low base effects and, in the case of Egypt and Iran, a decrease in political risks.

We hold a broadly positive outlook on banking sectors across the Middle East in 2014 and beyond, and expect a slight convergence in growth rates due to base effects. We maintain our view that the Gulf will be the outperformer in the region as growth will be buoyed by significant government spending particularly on large-scale infrastructure projects, particularly in Saudi Arabia and Qatar. Outside of the GCC we forecast an uptick in credit growth in Egypt and Iran, due primarily to a decrease in political risks.

GCC To Outperform

GCC To Remain In Front
Middle East - Banking Sector Credit Growth % chg y-o-y

Banking Sector: Bright Outlook Across Region

BMI View: The GCC will remain the outperformer across MENA's banking sector over the coming years, though growth rates will slow as the effects of government stimulus wear off. Elsewhere, we are forecasting an uptick in banking sector assets on the back of low base effects and, in the case of Egypt and Iran, a decrease in political risks.

We hold a broadly positive outlook on banking sectors across the Middle East in 2014 and beyond, and expect a slight convergence in growth rates due to base effects. We maintain our view that the Gulf will be the outperformer in the region as growth will be buoyed by significant government spending particularly on large-scale infrastructure projects, particularly in Saudi Arabia and Qatar. Outside of the GCC we forecast an uptick in credit growth in Egypt and Iran, due primarily to a decrease in political risks.

GCC To Remain In Front
Middle East - Banking Sector Credit Growth % chg y-o-y

GCC To Outperform

We expect GCC banks to continue outperforming the rest of the region in terms of profitability and asset growth over the second half of 2014 and heading into 2015. Lending activity will remain strong for the most part, on the back of high government spending on infrastructure-related activities, dynamic retail lending segments in several countries (notably Saudi Arabia), and elevated levels of liquidity. We forecast an average annual credit growth rate of 10.4% across the six GCC economies by the end of 2014, compared to 8.8% in 2013 and 11.6% in 2012.

We maintain a positive medium-term outlook towards the Saudi Arabian commercial banking sector, despite mixed earnings results for 2013 linked to the government's workforce nationalisation ('Saudisation') efforts. The nascent mortgage lending market represents a fertile territory for banks' expansion: the Central Bank has now begun to approve licenses for mortgage activities to financial companies, issuing its first one to Riyad Bank in December 2013. This factor should underpin strong growth in mortgage finance going forward: housing loans have already expanded by a quarterly average of 26.5% y-o-y since 2010, albeit from a low base.

We have upgraded our already positive outlook on the UAE's banking sector as growth prospects have been improved by the relatively smooth restructuring of much of Dubai's debt. At the start of the year, Dubai had approximately USD30.1bn due in 2014, but almost half has already been restructured - removing the main risk to the emirate and country's banking sector. The only notable drag on banking sector growth is the introduction in January 2014 of limits on first-time mortgages to 75% and 80% of the property's value, for foreigners and UAE nationals, respectively, to help prevent another unsustainable rise in the local property market.

Plenty Of Room For Growth
Middle East - Total Banking Sector Assets

Growth To Pick Up Elsewhere

Outside of the GCC, we expect asset growth to pick up in 2014, particularly in Egypt and Iran. The protracted crisis in Iran's banking industry will alleviate in 2014. Gradually declining price pressures will lead to a return of real growth of deposits, while improving investor and consumer confidence and a return to growth in the economy will trigger an uptick in lending.

That said, systemic risks in the industry will remain significant. Under our view that core international sanctions against Iran are set to remain in place over the next one to three years, Iranian banks will be unable to raise capital in international bond markets. An elevated non-performing loans ratio will also remain a key source of instability. While the government will implement reforms of the banking industry this year, their effects will be felt only over the medium term. As a result, we cannot preclude that some defaults by commercial banks will take place in 2014, and capital injections by the central bank will remain key to reduce risks.

Egypt Left Behind
Middle East - Loan / Deposit Ratio, %

Total assets in the Israeli banking sector will also return to growth in 2014, after having declined in year-on-year terms for much of 2013. That said, slow growth in private consumption and a low interest rate environment will ensure that loan growth remains slow.

A combination of stricter regulations and slack growth in the economy will ensure that profitability in the Israeli banking sector remains modest in 2014. However, risks to the stability of the sector are minimal. The loan-to-deposit ratio fell steadily throughout 2013, and we expect the ratio to remain subdued over the course of this year.

Egypt: Gradual Turnaround

We have turned moderately bullish on the outlook for Egypt's economy and banking sector over the coming quarters as greater political stability and low base effects provide room for moderate gains. Following subdued deposit and loan growth of 2.1% and 1.1%, respectively, in 2013, we forecast growth to come in at 5% and 7%, respectively in 2014. Egypt's political instability and currency weakness had manifested themselves in increasing dollarization of the country's banking sector. However, on the back of the more promising outlook for the economy, we believe depreciation of the Egyptian pound has run its course, and forecast sideways trade for the currency in the coming months. Indeed, the black market for dollars appears to have dwindled significantly since the turn of the year, suggesting that dollarization in the economy and banking sector will decline.

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