Banks’ profitability may rise by year-end

Banks in the Middle East still have high provisions, but most banks in the region have stayed well below the previous year’s level, which could lead to the overall increase in profitability by the end of 2010, according to a study by the management consulting firm Boston Consulting Group (BCG).

Based on 2010 first half results reported by the banks, the study is part of BCG’s biannual banking performance indices measuring the development of banking revenues (operating income) and profits for leading global banks.

The index includes 34 banks from across the GCC and represents nearly 80 per cent of the total regional banking sector.

Middle East banks, in total, saw the highest stability in revenues, profits and loan loss provisions compared to the previous year’s first half, although the performances vary significantly by country and bank, it said.

Even though profits declined slightly during the first half of 2010 compared to 2009, we expect a positive development for year-end results, assuming patterns continue to normalise following the downturn, the study said.

Amongst other trends, banks started to get operating costs under control, as they have been experiencing high revenue and profit pressure over the past few years. For Middle East banks overall, costs stayed flat and a number of banks even decreased their operating costs.

While revenues and profits remained relatively stable for banks in Saudi Arabia and Kuwait, banks in the UAE and Oman experienced a decline in profits. Banks in Qatar and Bahrain further increased their profits.

According to the study, the banking industry in the Middle East shows further signs of recovery but at a reduced pace. 2010 banking revenues have stagnated with potentially only a minor increase at the end of 2010 in comparison to 2009.

Only 15 out of the 34 banks covered by the index grew their revenues from the first half of 2009 to the first half of this year.

Profits decreased very slightly in the first half of 2010 but may recover during the course of the year, following the turnaround in 2009, a year earlier than the international benchmark.

Additionally, the Middle East banks’ revenues have stagnated for the first time in five years, the study found. Further, whist overall the region’s banks are still less affected from the financial crisis than their international peers, the international banks have recovered faster this year.

However, it added, although international banks recovered faster in 2010 but still remain at a much lower revenue and profit index level than their Middle East counterparts.

While the compound annual growth rate (CAGR) of retail revenues was over 25 per cent in the Middle East from 2001 to 2006; it has declined to an average annual growth rate of below four per cent between 2006 and 2009.

Since 2008, the time of very strong growth is over in the region and even though the industry is recovering from the worst of the crisis, returning to pre-crisis development in the foreseeable future is unlikely.

However, it added that while a number of banks have started cost reduction initiatives, simply reducing costs will not be sufficient to overcome the upcoming challenges over the next months and years. Banks in the region will need to increase their productivity, get their risks under control and focus on the right strategies and business models, the study said.