JEDDAH – The GCC banking sector grew robustly in 2013, driven by large government-led infrastructure and investment projects, with Qatar leading the pack. Most banks in the GCC have healthy funding profiles, with sound, high-quality assets in recent years. QNB Group expects this to enable them to continue to exhibit healthy credit growth funded by high domestic liquidity. The report expects the GCC banking system to grow robustly as major projects are rolled out across the region, driving real GDP growth of 4.6 percent this year. The GCC's traditional strengths of strong fiscal positions and persistent current-account surpluses are likely to support the banking sector. GCC banks have adequate liquidity buffers based on the highly liquid local deposit base (customer deposits grew by around 11 percent in 2013). In Qatar, higher lending associated with large infrastructure projects, a low cost of funding and foreign acquisitions have all supported banks' growth. Loan growth in Qatar was 23 percent in 2013. With the acceleration of investment projects ahead of the 2022 FIFA World Cup, these trends are likely to continue going forward. Meanwhile, deposit growth continued at a rapid pace, rising by around 24 percent in 2013, with the public sector being the key driver for overall gains, reflecting the large fiscal surplus. Higher lending, a low cost base and low provisioning requirements have all supported the banks' overall profitability, with a return on equity of 16.0 percent in 2013. In the region's largest banking sector, Saudi Arabia, asset growth of 8.5 percent was achieved in 2013 primarily driven by a 10.0 percent expansion in credit as the Kingdom rolled out some major transport infrastructure projects and as trade-related demand grew. The banking system in Saudi Arabia has a solid and growing deposit base (8.1 percent growth in 2013), primarily from the public sector. As a result of the benign operating environment, asset quality, measured by non-performing loans (NPLs) declined to 1.6 percent in the first half of 2013. Saudi Arabian banks have sustained their profitability, with a return on equity of 14.8 percent in 2013, owing to a prevalence of low-cost funding and strong operational efficiency. The next largest banking sector, the UAE, achieved asset growth of 8.5 percent in 2013. This was driven by strong growth in lending to the government (around 11 percent). Credit to private sector companies and households expanded moderately (5 percent). However, lending to the real estate sector was flat as the government introduced macro-prudential lending limits to help prevent overexposure to the real estate market, particularly in Dubai where property prices rose 26 percent in 2013. Overall improvements in asset quality with NPLs of 9.4 percent witnessed in the first half of 2013 drove down loan-loss provisions which in turn have supported UAE banks' return on equity of 12.6 percent last year. Kuwait's banking sector continues to remain moderate, supported by high oil revenues and government spending. The banking system continues to remain heavily deposit funded and benefits from access to government related deposits. As a result, banking sector asset growth was 9.0 percent in 2013. Moderate credit growth and margin pressures have constrained revenue growth and thus return on equity fell to 5.6 percent in 2013 from 6.6 percent in 2012. Kuwaiti banks have made considerable progress in rehabilitating their loan books following the 2008-09 crisis, and this along with the healthy operating environment, has meant that NPLs fell to 3.9 percent in the third quarter of last year. The banking system in Oman remained benign in 2013 reflecting stable macroeconomic conditions that have supported low NPLs (2.2 percent in the third quarter of 2013), healthy levels of capitalization and a stable deposit funding base. Prospects for Omani asset growth have been sound on the back of the increase in government spending on infrastructure – asset growth was an estimated 8.2 percent in 2013. In addition, Omani banks have maintained solid profitability with a return on equity of 13.1 percent in 2013. Furthermore, high government spending has boosted bank lending in recent years (up 5.2 percent in 2013), and a favorable economic environment will continue to support bank credit conditions and create lending opportunities going forward. Looking ahead, the GCC's positive economic growth outlook, supported by high hydrocarbon prices and strong government spending, is expected to support the continued expansion of the regional banking sector, with Qatar leading the way. — SG
