Loan loss provisions down by 35 per cent; operating costs rise by 16 per cent
MUSCAT -- The banking industry in Oman experienced an 11 per cent increase in revenues in 2011. Bank profits saw a more modest growth of 2 per cent.
According to a study by The Boston Consulting Group (BCG), the positive news for the Omani banking sector comes on the back of a significant decrease in banks' loan loss provisions (LLPs) -- the latter declined by 35 per cent in 2011, marking the second biggest drop among GCC markets. However, this development was partly offset by a concurrent 16 per cent increase in operating expenses.
Based on 2011 annual results as reported by the banks in the first quarter of 2012, the new study is part of BCG's annual banking performance indices measuring the development of banking revenues (operating income) and profits for leading Middle East banks.
BCG launched the first edition of the banking performance index in the Middle East in April 2009, creating a customised index specifically for the regional banking markets, with 2005 revenues and profits as starting benchmarks. The index covers 34 banks across Saudi Arabia, Bahrain, Kuwait, Qatar, Oman and UAE, capturing nearly 80 per cent of the total regional banking sector.
The study says Omani banking sector continued its multi-year steady performance in 2011.
Dr Reinhold Leichtfuss (pictured), Senior Partner and Managing Director in BCG's Dubai office and leader of BCG's Financial Institutions practice in the Middle East said: "Oman's banking sector in 2011 saw strong growth, particularly in the retail sector. Retail revenues grew by an impressive 20 per cent in 2011. In comparison, the corporate banking performance was weaker, with corporate revenues growing at 4 per cent compared to 2010."
Overall, the banking industry in the Middle East experienced a healthy revenue growth of 7 per cent in 2011, after revenues had stagnated the year before. Profits also increased significantly in 2011 and reached the highest level since the all-time high of 2007. Loan loss provisions (LLPs) fell by 2 per cent although a number of banks that were previously not affected and had relatively low LLPs needed to make more provisions.
Leichtfuss commented: "The performance of Middle East banks in 2011 testifies to the strength of the GCC economies and banking systems. Furthermore, this performance is set against the backdrop of lower revenue and profit index levels amongst international banks. This widening gap means that despite some continuing challenges, the leading banks in the GCC can leverage this partial withdrawal of international banks to gain market shares and expand footprints."
While banks in Saudi Arabia, UAE, Kuwait and Bahrain had healthy revenue growth rates between 4 per cent and 8 per cent in 2011, the banking systems in Oman and Qatar grew revenues by 11 per cent and 22 per cent, respectively. In addition, banks in all countries, except in Kuwait and Oman, achieved double digit aggregate profit growth rates.
Loan loss provisions varied by country: While some banks in Qatar, Kuwait and UAE saw significant increases, those in Saudi Arabia, Oman and Bahrain were able to reduce their loan loss provisions. In absolute terms, loan loss provisions were highest in UAE and Kuwait.
In 2011, retail banking revenues in the GCC which had remained rather flat during the last few years experienced an uptick of some 3 per cent, largely due to the 3 per cent increase in Saudi Arabia and supported by strong growth in Oman and Qatar of around 20 per cent. In contrast, retail revenues in UAE and Bahrain dropped by 2 per cent and 7 per cent respectively. On the whole, the variance between growth rates of individual banks in retail is very high and ranges from -25 per cent to +39 per cent.
GCC retail profits, which had been declining in the previous years, saw a significant uptick of 11 per cent overall and positive growth rates in all countries. Nevertheless, the profit level in 2011 remained slightly below 2005 and 2006 levels which were exceptional retail years in the GCC.
The corporate segment reached top index levels both in revenues and in profits in 2011. The growth was witnessed across all GCC countries with corporate banking profits rebounding particularly well in Saudi Arabia.
Although the 2011 upturn has been quite strong for banks in Saudi Arabia and across the GCC, returning to pre-crisis levels of growth in the foreseeable future is unlikely. This is even more so given that the region's regulatory bodies are becoming more cautious with regards to lending and fee policies of banks.
Therefore, the challenge of improving competitiveness in an environment of slower growth remains.
The BCG study emphasises that leading banks in the region have great opportunities, both within their respective markets as well as beyond. In particular, those who succeed in sharpening their offers and value propositions for different customer segments, becoming truly customer centric, Increasing sales orientation and becoming more systematic in cross selling, exploiting the full potential of multichannel management and new technologies, re-engineering and automating processes and improving performance management can truly make a difference and win market share. These improvement levers apply to both retail and for corporate banking.
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading adviser on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges and transform their enterprises.
© Oman Daily Observer 2012
