Saudi Arabia’s Islamic banking assets at $169 bln in 2018: report

Saudi Arabia accounted for the biggest share of Islamic banking assets at $168.7 billion in 2018 followed by the UAE at $130 billion within the GCC countries, according to a report by Kamco Research.

The 5-year CAGR for Islamic banks was marginally better at 7.8 percent as compared to 6.9 percent for the conventional lenders in the GCC, it said.

The overall share of Islamic listed banks in the region’s total banking sector assets has remained almost stable at around 25 percent, the report added.

In addition, the robust balance sheet of GCC banks along with adequate coverage ratios resulted in an “above average” credit ratings for the sector.

The average rating of GCC banks stood at an investment grade of “A” due to a majority of the countries in the GCC being in the investment grade category.

"Strong government support to local banks also resulted in higher credit ratings. Nevertheless, the concentration of lending to specific sectors like real estate and to government initiated projects is a cause of concern for the sector," the report noted.

Despite rising profitability, the optimal utilization of earning assets was a key issue with GCC banks as seen from the declining loan-to-deposit ratio over the past two years.

"With the economic downturn seen over the past few years led by the decline in oil prices, banks were finding it increasingly difficult to boost lending and overall revenues. Furthermore, with the next wave targeted at fintech, banks need to invest in adding capabilities which includes cutting costs by reducing physical presence," the consultancy said.

Meanwhile, risk-weighted exposure with the implementation of IFRS 9 is putting further stress on the banking business. That said, the NPL ratio for the aggregate GCC banking sector increased from 5.4 percent in 2017 to 8 percent in 2018 with bad loans (including 90-day past due loans) increasing from $73 billion in 2017 to $111.6 billion last year.

The ratio is expected to deteriorate if the economy fails to show progress in the near term as any slowdown would result into higher bad loans and with the new criteria of IFRS 9, loans could quickly fall under the Stage 3 category of impaired loans, Kamco stated.