Doha: Against the backdrop of the COVID-19 pandemic and volatile oil prices, banks in the GCC will continue to consolidate to strengthen their balance sheet, global consultancy firm KPMG has said.
The year 2020 has been a challenging year for banks globally. For economies in the region, the pandemic along with a volatile oil price resulted in contractions in credit and equity markets. Despite the banking sector soundness that provided an important cushioning in the GCC to the oil price decline since 2014, liquidity conditions have started to tighten due to the recent dual shock.
The current unprecedented times of the pandemic have resulted in subdued business activity, especially for small and medium sized enterprise’s (SME), which account for nearly 85 - 90 percent of registered companies in the region. This has resulted in banks experiencing surge in non-performing loans or credit losses, further impacting net income margins. In GCC, the overall net profit declined by 34.7 percent to $12.3bn in H1 2020, compared with $18.8bn in H1 2019.
Venkat Krishnaswamy (pictured), Partner and Head of Advisory at KPMG Qatar, said: “The impact of COVID-19 coupled with volatile oil prices and low interest rates is having a significant effect on the core profitability of banks in the region. The increase in non-performing loans (NPLs) due to increasing cash flow stress of corporate and retail customers have further impacted return to the shareholders. Due to a combination of these factors, banking profits are expected to come under strain, raising concerns over the operating models of some financial institutions”.
The five largest banks in the region account for approximately 70 percent of the total assets. The top five banks in Qatar have a market share (based on total assets as on December 31, 2020) of approximately 86 percent, making it extremely difficult for the remaining smaller players to maintain profits especially in current scenario.
Many small banks from the region can be seen turning to consolidation as a way to overcome negative effects of the economic fallout. Principally, a stronger bank will better address the stakeholder’s concerns towards stability, solvency and liquidity.
Himanshu Bhatla, Associate Director at KPMG Qatar and Lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction, added: “With the global economy coming under stress leading to reduced profitability coupled with increasing pressure from regulators for capital requirements and compliance costs, we are witnessing a rising trend in the M&A activity in the banking industry with the latest one being Masraf Al Rayan entering into a merger agreement with Al Khaliji Commercial Bank”.
Karthik Jagadeesan, Manager at KPMG Qatar and Co-Lead for Masraf Al Rayan and Al Khaliji Commercial Bank merger transaction, added: “The significant recovery within the global capital markets in the past few months, the economic support measures by the central banks and therefore the resilience shown by a number of the larger banks through the strength of their balance sheets has acted as a catalyst to absorb shocks and led to a recovery in banking stock valuations in the region".
