Banks in a tough wicket

Manama : 0GCC banks including those in Bahrain has entered a tough period ahead with margin compression, tightening liquidity, moderate asset and profit growth, limited capital market activity, greater focus on cost reduction and a widespread need for greater capital and funding. This was noted by a report by KPMG released yesterday.

Banking sector in the Kingdom might witness a lot of restructuring in the form of mergers and acquisition in 2016.” Mergers and acquisitions will continue to be explored and small/medium-sized banks are expected to synergise to improve the chances of survival through effective human capital utilisation, liquidity management and capital utilisation. We expect banks to explore various forms of financial and corporate reorganisation to optimise capital structure and also improve risk profile,” the global consultant group’s report titled “GCC Listed Bank Results: A new paradigm” says.

The sectors’ focus on cost cutting in 2015 is expected to continue going forward, as the banks have a high operating cost-to-income ratio, 46.5 per cent at the end of 2015, as compared to its peers in the GCC. Also the sector is exposed to high concentration in the real estate and energy sectors, which have come under increased stress due to current economic conditions, and this has raised concerns, says the report.

Another challenge for the industry will be tightened liquidity scene, partly due to regional as well as global reasons including stronger dollar. 

“Investing in high-quality liquid assets to comply with Basel III requirements will impact the banking sector’s ability to deploy capital for business growth. The second half of 2015 witnessed a liquidity crunch in the region with a substantial portion of liquidity being invested in sovereign issues in addition to declining government and related entity deposits. We expect the CBB to intervene by closely monitoring reserve requirements in 2016.”

Also, intense competition among domestic banks will force banks to look outside the Kingdom for growth; but, the report says, “The financial hub status of Bahrain and related differentiation is constantly being challenged, with neighbouring countries such as United Arab Emirates and Qatar developing financial centers, providing an alternative option to the regional and international financial services industry.”

Jalil Al Aali, Head of Financial Services in KPMG Bahrain said in a statement, “The banking sector in the region has moved a long way from the days of excess capital and liquidity. Our report reveals that the sector is no longer growing at double-digit growth rates. Banks are experiencing new challenges as a result of the current economic environment, greater regulatory oversight, supervision and stiffer competition. However the sector is still growing, although at a slower pace than previous years.”

Al Aaliadded that most banks are being forced to adapt to the challenging environment. “We are seeing banks compete more aggressively, focusing more on efficiencies, and seeking innovative ways to grow and deliver positive results whilst managing shareholder expectations. We firmly believe that some of the fundamental changes we are witnessing, whether it be increasing regulatory scrutiny or greater efficiency will help the financial services industry and provide for greater stability in the long-term”.

The report analyses the published financial statements of 56 leading listed commercial banks across Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. The report covers over 90 percent of the region’s listed banking assets, according to KPMG.