The net profit posted by GCC listed banks declined from $36.6 billion in 2019 to $25.4 billion in 2020, marking a fall of 30.6% as the pandemic resulted in financial disruptions the world over, said professional services firm KPMG in a new report.
While the capital adequacy ratio increased from 18.4% in 2019 to 18.7%, total assets and cost-to-income ratio rose from $2.3 trillion to $2.5 trillion and from 40.4% to 41.4%, respectively, according to the report titled “Banks redefined”.
Citing some of the key trends associated with the Kuwait banking sector, Bhavesh Gandhi, Partner and Head of Financial Services at KPMG in Kuwait stated: “The Kuwait banking sector has reported a growth of 5.3% in total assets, however, net profit has declined by 52.8% due to historic low interest rates in 2020 and higher charge for provision for credit losses, on account of the Covid-19 pandemic. The Kuwait banking sector is well capitalized with the average capital adequacy ratio of 17.9%, which is comfortably higher than the CBK’s mandated minimum of 13.0%.”
The overall non-performing loans (NPL) ratio for the GCC banking sector has increased by 0.4% and now stands at 3.4%.
Speaking about the NPLs, Gandhi added: “The non-performing loans ratio increased by 0.3% amid the crisis and remained at a low level of 1.6% in 2020. It is predicted that NPL and loan impairment will rise in 2021 as the true effects of the pandemic on businesses become clearer. Asset growth is not anticipated to pick up significantly from the last year as banks adopt a more cautious approach to lending and banks are expected to proactively manage their non-performing portfolios through possible sales and write-offs.”
Regionally, in 2020, banks had experienced margin pressures, so cost and operational efficiencies are expected to remain a top priority for management in 2021.Banks need to maintain a balance between face-to-face client interactions and remote working to retain their top talent and reduce of real estate costs. The pandemic has encouraged banks to become agile and accelerate their digital transformation plans by adopting branchless and cashless models. Banks in the region must also embrace technology for areas such as cybersecurity, Basel IV regulations, eKYC, anti-money laundering, etc.
Looking in the future, the GCC banks may prepare for profitability getting impacted due to the pandemic. However, the situation might not be as bad as 2020 owing to reasons such as shrinking profit margins, slower loan growth and rising loan provisioning.
Furthermore, the ESG (environmental, social and governance) agenda is expected to gain more importance this year and beyond as investors place better scrutiny around banking practices. Lenders in the region have also been consolidating as they aspire to stay competitive. Mergers in 2020 as well as potential mergers in future could create stronger and larger financial institutions and this consolidation is expected to continue in 2021.
All things considered, ‘cautious optimism’ would be the way forward for the GCC banking sector. Currently, banks are reasonably positioned to combat the economic challenges. However, the uncertainty of the pandemic could result in muted growth with greater caution, the report said.
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