Capital and liquidity improved in the Middle East

• 2016 has been a challenging year for Middle Eastern banks, due to low oil prices, economic uncertainty and political instability in the region
• Banks in the Middle East continued to face liquidity pressures, although the more stable oil prices and international sovereign bond issues helped moderate the pressures in the fourth quarter of 2016
• Banks in four African countries had weaker capital positions and worse asset quality

Banks continued to face liquidity pressures, although the more stable oil prices and international sovereign bond issues helped to moderate the pressures in the fourth quarter of 2016. Banks in Kuwait, Oman and Qatar had average loan to deposit ratio in excess of 100%. Most countries, however, saw increased liquidity in 2016, due to the initiatives to comply with Basel III Liquidity standards.

Qatar National Bank and Standard Bank Group remained top of The Middle East and Africa 100 ranking by assets. The Middle East and Africa 100 (MEA 100) 2017 is an evaluation of the 50 largest banks in the Middle East and the 50 largest banks in Africa for the financial year 2016. The study covers 12 countries, namely Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE) in the Middle East and Egypt, Kenya, Nigeria and South Africa in Africa.

In 2016, the asset gap between the two largest banks widened, as total assets of Qatar National Bank expended by 34% to $198 billion and Standard Bank Group registered a 1.6% decline in its total assets. First Abu Dhabi Bank becomes the UAE’s largest bank and the second largest bank in the Middle East and Africa after the successful completion of a merger of National Bank of Abu Dhabi and First Gulf Bank on 1st April 2017. Going forwards, further consolidation is expected in the region, as it will help enhance competitiveness of the banking sector.

Profits dented

The year 2016 has been a challenging year for Middle Eastern banks, due to low oil prices, economic uncertainty and political instability in the region. Despite the considerable focus on operational efficiency, the profitability of Middle Eastern banks in general came under pressure, with combined net profit of 50 largest banks in the region slipping by 4% in 2016. As a result, their weighted average return on equity deteriorated from 14.3% in 2015 to 12% in 2016, and average return on assets also went down from 1.7% to 1.5%. On average, banks in Bahrain, Kuwait and Saudi Arabia saw the biggest drop in their net profits, while the profitability of banks in Jordan and Lebanon improved.

Almost all countries across the region witnessed a slowdown in credit extended by banks, with the lending growth rate decelerating to an average of 5.4% in 2016 from an average of 8.5% in the previous year. Meanwhile, higher funding costs resulted in narrowed net interest margin. The cheap government and government-related deposits fell, as low oil price had a negative impact on government revenues. Thus, there was greater competition among banks on the liability side of balance sheet and also a shift towards more expensive alternative funding sources. Furthermore, the asset quality of the banking industry remained under pressure and overall impairment charges on loans and advances went up in 2016, which also weighed heavily on banks’ profitability.

Improved capitalisation and liquidity in Middle East

Samba Financial Group, Bank Audi and Banque Saudi Fransi topped this year’s ranking of the strongest banks in the Middle East, based on the financial performance in 2016. When measured on an asset-weighted basis, banks in Saudi Arabia, UAE and Qatar continued to achieve the highest average strength score at 3.85, 3.69 and 3.58 out of five, respectively, while banks in Oman underperformed their peers, with the lowest average strength score at 3.01.

Regulatory capital adequacy requirements have continued to increase, as Basel III regulations are gradually implemented. In general, Middle Eastern banks held higher levels of capital in 2016. The weighted average capital adequacy ratio went up to 17.8% in 2016 from 17% in the previous year. Saudi banks and UAE banks had the highest average capital adequacy ratio among the eight countries, at 19.1% and 18.8%, respectively.

Banks continued to face liquidity pressures, although the more stable oil prices and international sovereign bond issues helped to moderate the pressures in the fourth quarter of 2016. Banks in Kuwait, Oman and Qatar had average loan to deposit ratio in excess of 100%. Most countries, however, saw increased liquidity in 2016, due to the initiatives to comply with Basel III Liquidity standards.

Capital and asset quality concerns in Africa

Compared to Middle East, banks in these four African countries registered stronger balance sheet and profit growth, and maintained higher level of return on equity and assets and lower loan to deposit ratios. Nevertheless, they had weaker capital positions and worse asset quality. Weaker capitalisation level is particularly a concern for Egypt.

With the highest weighted average strength score at 3.77 out of five, Egyptian banks performed better in most areas except for capitalisation. The average capital adequacy ratio of Egyptian banks was lower from 12.9% in 2015 to at 12.1% in 2016. Egyptian banks have high exposure to foreign-currency loans, while most capital bases are in local currency. The weaker capital adequacy ratio can be largely attributed to the depreciation of the Egyptian pound in November 2016.

More Nigerian banks made it into the list of top ten strongest banks this year. Overall, Nigerian banks experienced considerable improvement in their financial performance in 2016. They recorded strong growth of loans and deposits, better profitability and higher capital adequacy ratio. However, strong profit growth they achieved is primarily driven by non-recurring foreign exchange revaluation gains. Their asset quality weakened significantly, with the average NPL ratio up from 7.2% in 2015 to 9.4% in 2016 and the average provision coverage ratio dropping from 86% to 77%.

Going forward, banks should take action to ease asset quality pressures and maintain profitability, and also meet the new requirements, as regulatory requirements will continue to evolve.

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