Banking Sector: Regional Convergence, But GCC To Outperform

BMI View: We hold a broadly positive outlook on banking sectors across the Middle East in H214 and beyond, and expect a slight convergence in growth rates due to base effects .   The Gulf Cooperation Council will remain the outperformer across the Middle East and North Africa's banking sector over the coming years, although credit growth will continue to ease throughout the coming quarters. Outside of the Gulf, we forecast an uptick in asset growth in Egypt and Iran on the back of an improving economic outlook and low base effects.  

We hold a broadly positive outlook on banking sectors across the Middle East in H214 and beyond, and expect a slight convergence in growth rates due to base effects. Commercial banks from the six economies of the Gulf Cooperation Council (GCC) are set to remain the regional outperformers as we head into 2015, although credit growth will continue to ease throughout the coming quarters. High liquidity has helped to drive down banks' funding costs, while asset quality (as measured by non-performing loans) has stayed on an improving path over the first half of 2014. Threats to stability remain low, with GCC banks well capitalised compared with regional and global peers; the implementation of Basel III capital standards is so far progressing smoothly. We forecast the average loan-to-deposit ratio across the GCC to fall to 0.91 by the end of 2015, below 0.95 in 2012.

Despite elevated deposit growth, lending activity is moderating across most of the GCC, either as a result of new regulations (in Oman and Qatar) or a decline in demand after two years of solid expansion. In Qatar - hitherto the most buoyant market - rising uncertainty over the country's hosting of the 2022 FIFA World Cup could further weaken lending growth over the second half of 2014, although we expect it to remain in double-digit territory. We forecast average annual credit growth of 9.4% in the GCC by the end of the year (rising slightly to 9.9% in 2015), a slight uptick from the rate of 8.8% recorded in 2013 but down from 11.6% in 2012. The more limited lending growth opportunities, combined with the high availability of capital, will fuel even greater price competition among GCC banks over the coming quarters.

Convergence, But GCC To Lead
Middle East - Banking Sector Credit Growth, % y-o-y

BMI View: We hold a broadly positive outlook on banking sectors across the Middle East in H214 and beyond, and expect a slight convergence in growth rates due to base effects .   The Gulf Cooperation Council will remain the outperformer across the Middle East and North Africa's banking sector over the coming years, although credit growth will continue to ease throughout the coming quarters. Outside of the Gulf, we forecast an uptick in asset growth in Egypt and Iran on the back of an improving economic outlook and low base effects.  

We hold a broadly positive outlook on banking sectors across the Middle East in H214 and beyond, and expect a slight convergence in growth rates due to base effects. Commercial banks from the six economies of the Gulf Cooperation Council (GCC) are set to remain the regional outperformers as we head into 2015, although credit growth will continue to ease throughout the coming quarters. High liquidity has helped to drive down banks' funding costs, while asset quality (as measured by non-performing loans) has stayed on an improving path over the first half of 2014. Threats to stability remain low, with GCC banks well capitalised compared with regional and global peers; the implementation of Basel III capital standards is so far progressing smoothly. We forecast the average loan-to-deposit ratio across the GCC to fall to 0.91 by the end of 2015, below 0.95 in 2012.

Convergence, But GCC To Lead
Middle East - Banking Sector Credit Growth, % y-o-y

Despite elevated deposit growth, lending activity is moderating across most of the GCC, either as a result of new regulations (in Oman and Qatar) or a decline in demand after two years of solid expansion. In Qatar - hitherto the most buoyant market - rising uncertainty over the country's hosting of the 2022 FIFA World Cup could further weaken lending growth over the second half of 2014, although we expect it to remain in double-digit territory. We forecast average annual credit growth of 9.4% in the GCC by the end of the year (rising slightly to 9.9% in 2015), a slight uptick from the rate of 8.8% recorded in 2013 but down from 11.6% in 2012. The more limited lending growth opportunities, combined with the high availability of capital, will fuel even greater price competition among GCC banks over the coming quarters.

Real Estate To Become Main Risk In UAE

We maintain our positive outlook for the UAE's banking sector, in line with our bullish outlook on the Gulf state's non-oil economy. The restructuring of Dubai's debt, which had been the main risk to growth in the emirate and the wider country, has occurred smoothly, a situation we expect to continue. Given easing risks of a debt-funding cliff in 2014, the main cause for concern is increasingly the country's real estate market. According to government statistics, house price inflation in Dubai reached 4.9% year-on-year in April. This figure understates the real recovery, as the housing survey excludes areas populated by expatriates. While there are parallels between the run-up in asset values currently and before the crash in 2008, we believe the country has enacted better regulation since the crisis. That said, unless the run-up in asset values slows, the housing market will remain the main risk to banking sector profitability going into 2015.

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

Growth To Accelerate Outside The GCC

Outside of the GCC, we expect asset and credit growth to pick up in H214 and 2015, particularly in Egypt and Iran. We are relatively bullish on the outlook for Egypt's economy and banking sector over the coming quarters, as greater political stability and low base effects will provide ample room for growth. Following subdued deposit and loan growth of 2.1% and 1.1%, respectively, in 2013, we forecast deposit and loan growth to come in at 11.0% and 7.0% respectively in 2014 and stay around these levels over the forecast period to 2018. 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.

Dollarization Risks To Diminish
Egypt - Private Business Deposits By Currency, % chg y-o-y

Risks to systemic stability in the Iranian banking sector have eased, and the worst of the crisis is now behind us. Declining inflation and an improving macroeconomic environment will decrease the risk of bank defaults in H214 and 2015, and the industry will return to growth this year.

Despite an improved outlook, profitability in the Iranian banking industry will remain limited. The issue of bad loans and the dominance of highly leveraged state-owned banks in the financial system will remain key constraints to profitability. Monetary authorities and the government have highlighted the need to reform the banking sector over the past few quarters. However, technical, political and institutional challenges will slow the pace of reform, with effects likely to be felt only in a few years. In addition, talks between the P5+1 countries and Iran on the latter's nuclear programme will continue over the coming quarters, and key banking sanctions will remain in place. Even if a breakthrough in talks occurs, lifting sanctions will take at least a few quarters, and Iranian financial entities will find it virtually impossible to raise capital in international bond markets for the time being.

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Related sectors of this article: Economy, Banking/Finance, Industry Data - Commercial Banking, Economic Policy, Deposits, Loans, Assets
Geography: Egypt, Middle East, Bahrain, Iran, Israel, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates, Middle East
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