Profits up, but pressure remains on bank margins

The year has begun on a strong note for the economy, and bank profits are inching up, but fierce competition will still keep margins under pressure, said bankers and analysts yesterday at a forum in Dubai.

Profits are set to grow, but this growth will be offset somewhat by the banks' conservative lending policy, an upshot of non-performing loans, they said, speaking at Fleming Gulf''s Middle East Retail Banking Forum.

"There is an increasing appetite to grow. Everyone is in the growth mode, but there is fierce competition and increasing customer expectations, so there is a humongous pressure on profits among retail banks," said Sanjoy Sen, Consumer Bank Head - Middle East, Citibank.

"Lender now have to fight for business," Damian Hitchen, Managing Director of Gulf Lenders Network, said. "All lenders are chasing the same customer. Customers are now more discerning and lenders need to adapt their proposition to cater to market conditions."

"When we are facing slower growth, banking market will lead to higher competition," said Dr Reinhold Leichtfuss, Senior Partner and Managing Director at Boston Consulting Group (BCG) in the Middle East. "Banks are becoming more cautious, and we see – in the past two years – quite a margin pressure. Because there is less revenue, profit growth will be slower and margin pressure will remain."

Data from BCG show that Middle East retail banks' revenue profits were decreasing since 2008, despite increasing revenues on a year-on-year basis.

According to BCG Revenue and Profit Performance Indices for the Middle East, revenues increased by three per cent in 2008 to 116 points, and two per cent in 2008 to reach 122 points. Profits, however, took a 16 per cent dip in 2008 from 113 in 2007 to 95, and took another dive of seven per cent in 2009 to 88.

The decrease in profit margins is higher in BCG's indices for international banks, which saw a 37 and 56 per cent decrease in profits in 2007 and 2008, respectively. This is against a seven per cent increase in 2008 (131 from 123) and a four per cent drop (126) in 2009.

"Retail banking profits in the Middle East are declining, but they are declining at a lower rate than they do internationally, so loan loss provision is even bigger for leading international banks," Leichtfuss said.

The increase in NPLs and provisioning will continue to remain a leitmotif this year, which will further press down upon the margins.

"Absolutely, I can confidently say that every bank is facing the pressure," Sundar Parthasarathy, ADCB SVP and Head of Consumer Assets, Consumer Banking Group, told Emirates Business on the sidelines of the banking forum. "What really happened is that customers are facing stress in terms of payments because of cuts in salaries and jobs."

Profitability went downhill as the GCC banking sector in 2009 was marred by credit fears surfacing from the troubled Saudi conglomerates Sa'ad and Algosaibi in 1H09, among others.

According to Kuwait-based Global Investment House, the sector recorded an annual profitability decline of three per cent in 2009. With the exception of Qatari banks that recorded a marginal profitability growth of one per cent in 2009, all other regional banking sectors experienced a decline, with Oman recording the highest annual drop of 21 per cent.

During 2009, the banks followed a cautious approach in expanding their loan portfolios, with gross loans recording an annual rise of two per cent, while NPLs showed a significant increase of 98 per cent year-on-year, supplementing an overall increase in of 190 bps (from 2.1 per cent in 2008 to 4.0 per cent in 2009) in NPL ratio. Kuwait reported the highest NPL ratio of 11.7 per cent (a jump of 489 bps in a year).

The top-line of the banks in the GCC, nonetheless, improved significantly, despite the economic woes haunting their respective countries. The aggregate net interest income (NII) for the GCC grew healthily by 12 per cent year on year. UAE and Kuwaiti banks remained at the ends of the spectrum, with the former's NII up by 29 per cent and the latter's decreasing by one per cent in 2009.

Leichtfuss said retail banking is still more profitable and stable than other banks' business segments. Regional banks' return on assets, which came down last year, are still high compared to other region's banks.

Although the economy has begun to stabilise, banks continue to have a "very cautious" appetite for growing assets, Sen said.

"Banks have to weigh on who to lend [to] and how much to lend. Many countries still don't have credit bureaus, so there a feeling of uncertainty," he added.

This year will mark the industry's increased focus on risk management. Liquidity will only go to those who can pay back, Dr Adnan Chilwan, Executive Vice-President and Chief of Retail Banking, Dubai Islamic Bank, told this newspaper.

He said: "During 2009, the economy witnessed the effects of the global crisis. This reflected on the banking industry within the UAE, too, which began to be more cautious. In 2010, deposit mobilisation, liquidity positions and risk management will continue to be of strategic importance for every bank. Banks will ensure that they mobilise deposits, maintain strong liquidity positions and lend to those who have adequate capacity to service their commitments."

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