- August 8, 2012:
1. Market Overview
The banking sector in the Middle East and North Africa witnessed recovery in the year 2010 and 2011 after the international financial crisis. The downside risk in MENA Banks is limited compared to its international peers. The region is characterised by high financial support from the government, high public spending, less integration with global markets and low exposure to the sovereign debt crisis.
Due to conservative risk practices adopted by MENA banks, the foreign assets are primarily in the form of deposits with almost 85 per cent denominated in the US dollars and the rest in currencies of stronger European nations such as Germany and France.
2. Capital Adequacy
As issued by Capital IQ, the median Tier 1 capital ratio of the MENA banks was estimated at around 15 per cent while median capital adequacy ratio was at 18 per cent in 2011. Frost & Sullivan expects both these ratios to have strong fundamentals and place the MENA banks in a good position to comply with the new and stringent Basel III requirements, the full implementation of which is expected to take place by 2019.
3. Profitability Analysis
According to Capital IQ, the Middle Eastern banks recorded high net income margins of 42.3 per cent and 41.9 per cent in 2010 and 2011 respectively, as per Capital IQ. Alternatively, banks in North Africa recorded a net income margin of 30.2 per cent and 31.1 per cent in 2010 and 2011 respectively. However, Frost & Sullivan forecasts the profit margin to be maintained at the same level in 2012. Other profitability measures such as Return on Assets and Return on Equity were estimated at 1.6 per cent and 12.5 per cent respectively in 2011.
4. Asset Quality
Asset growth (Year-on-Year) stood at an aggregate of 5.4 per cent in 2011 and 6.5 per cent as of June 2012 for 81 banks in the Middle East. Overall asset growth recorded a Compound Annual Growth Rate (CAGR) of 20.4 per cent for 2003-2008 and is expected to grow at a CAGR of 7.5 per cent for2008-2014.
MENA banks also have low non-performing loans ratio when compared to their international peers. Non-performing loans as a percentage of total loans amounted to slightly less than 4 per cent in 2011, indicating strong asset quality. These banks also have high provisions to cover credit losses. Allowance for credit losses as a percentage of total non- erforming loans were recorded at 70.8 per cent and 93.5 per cent on an average for the Middle Eastern and North African banks respectively. High provisions and low non-performing loans together are again indicative of conservative risk practices adopted by the MENA banks.
MENA Banks have a low Net loan to deposits ratio of 34.5 per cent as compared to 80-85 per cent for European and US banks indicating a huge lending potential and a strong liquidity position. Frost & Sullivan recommends that while this ratio can be improved upon, precautions should be taken against excessive lending as this would imply taking increased risk and a weaker liquidity position.
The MENA banking sector benefits due to areas such as high profit margins, high capital adequacy ratios, strong government backing, low international credit exposure, access to cheap cost of funds, stronger liquidity position and low-debt domestic products, and lastly with its key economies delivering continuous fiscal surpluses. Overall, Frost & Sullivan has a bullish outlook on MENA banks and expects the MENA banks to serve as a good hedging instrument in the global banking sector.