MENA Quarterly Banking Report

MENA quarterly banking report

Q2 2020 Contents

Executive summary 03

Macroeconomic 04 indicators

Banking 09 performance

Sector insights 16

Annexure 18

About the report This report analyzes the Q2 2020 performance of 33 leading banks across the MENA region. The report is based on detailed financial information including balance sheets, income statements and management disclosures. All information is sourced from publicly available financial statements of banks. Executive summary

The important theme for the MENA banking sector across Q2 3. Interest margins are under pressure but aggregate net 2020 has been the fallout and response to the COVID-19 interest income (NII) of banks in the region expanded pandemic and the drop in oil prices. As with elsewhere in the moderately in Q2 2020. world, the COVID-19 pandemic has triggered a response from Major market themes and industry trends that we have noted governments and central banks in MENA announcing relief in Q2 2020 that will be relevant for the next few months measures to support the economy. Much of the transmission include: of these measures flows through the banking sector. Digitalization: on the backdrop of challenging market The banking sector’s resilience was tested during the COVID- conditions, acceleration of the digital journey is one of the key 19 pandemic and as banks continue to respond, recover and responses for MENA banking on their road to growth in the assist in the recovery of economies, it is also important to “new normal.” We are observing a positive change in mindset look beyond to the transformation for sustainable future toward digital transformation. Despite the performance growth. Key market themes such as digitalization and challenges, MENA banks are accelerating investments in regulatory pressures that emerged independently of COVID- customer experience and technology capabilities to enable a 19 pandemic not only continue to be relevant, but now wider revenue generation and cost optimization avenues. require robust and active steps from banks to ensure that MENA banks are increasingly adapting their traditional they remain competitive. operating models and propagating toward platform operating In this report, we provide an overview of Q2 2020 models which are underpinned by nimble governance, and macroeconomic indicators and banking sector performance FinTech and nonfinancial partnerships. coupled with sector insights and key trends. We hope that Regulatory focus: the COVID-19 pandemic has put increased these will help MENA banks to adequately benchmark their pressure on provisions and capital positions of banks. Though performance and assess market positioning among their there is some respite in the form of relaxation of capital and peers. liquidity requirements during the period of the crisis, banks Below given is an overview of the key highlights from the will still need to robustly plan for a return to normalcy. Focus results in Q2 2020 and a summary of the important themes remains on capital planning, optimization and stress testing to and industry trends seen in the banking sector. respond to the unprecedented nature of the crisis and its Key highlights in the results of the banking sector in Q2 2020 consequences. include: There is also a marked trend in revisiting IFRS 9 and credit 1. Subdued revenue growth and higher provisions due to the risk models with several MENA banks initiating a relook at COVID-19 pandemic. This trend is expected to continue assumptions, scenarios and models to ensure that until there is a recovery in economic activity, while there provisioning remains accurate. is a deliberate effort from banks across the region to While some regulatory changes such as Basel III have been grow revenue alongside the implementation of cost pushed by a year, regulators are keeping up the pressure in control measures. other areas, particularly on the IBOR transition front. UK’s 2. A jump in cost-to-income ratio notwithstanding cost FCA, which oversees LIBOR, revealed that notice of LIBOR’s control measures being put in place. UAE and Qatar cessation could arrive as soon as the end of this year. Several recorded a sharp jump in the cost-to-income ratio on MENA banks have initiated the IBOR transition process and account of higher loan restructuring and impairments. are now assessing the impact of this transition on their products, processes, systems and models.

MENA quarterly banking report: Q2 2020 3 Macroeconomic indicators

Section summary

Due to the sudden pandemic, 2020 has been an For Qatar, industrial production (dominated by oil and gas exceptionally challenging year till now for global and activities) was relatively well-positioned during the COVID- regional economies. The scenario is not different for the 19 pandemic lockdown. Now with the cautious reopening GCC countries alongside Egypt and Jordan, and there still of the economy, the pressure on economic activity and remains a great deal of uncertainty. domestic demand should gradually ease. Regional containment measures are weighing on domestic In Kuwait, pressure continues to mount on the activity, while the global downturn is hurting external Government to pass the long-anticipated debt law as weak demand. Moreover, oil exporters are hit by lower average oil prices take a toll on government finances and this new oil prices compared with 2019 and constrained oil law will enable tapping the international debt market. production following the OPEC+ deal. However, the fiscal Oman’s economy was weak going into the COVID-19 and monetary policy support in response to the pandemic pandemic and the economic outlook remains bleak with has been swift in most economies such as the UAE, KSA, the oil sector still weighed down. Kuwait, Oman and Qatar. These measures are expected to balance the economies and their outlook in the medium While Bahrain is expected to slide into recession in H2 term. 2020, a slow reopening of the economy in Egypt is expected to support the non-oil sector growth in coming In KSA, the fiscal austerity measures coupled with focused months. pro-growth policies are expected to strengthen economic activity in the medium term. Rising government debt coupled with ongoing regional and domestic drags remain a concern for Jordan. However, In UAE, the oil sector will remain a drag on growth, but the the four-year IMF loan is expected to fuel economic expected gradual improvement in non-oil activities activity in the medium term. including acceleration of planned projects should ease the overall scenario.

MENA quarterly banking report: Q2 2020 4 Macroeconomic indicators

KSA GDP (nominal) US$792.9b Low public and private debt, increased foreign exchange Government reserves and a robust sovereign credit rating enabled expenditure percentage 35.6 KSA to absorb the initial economic shock from the COVID- of GDP 19 pandemic and seal the temporary revenue shortfall. Consumer price index 97.9 In tandem with the efforts of Saudi Arabian Monetary (CPI) Authority (SAMA), the Ministry of Finance unveiled stimulus packages totaling SAR120b, while also agreeing to pay salaries of Saudi workers at struggling private Inflation (2.1) sector firms during the worst months of the pandemic. Domestic demand Amid the fiscal consolidation measures, the Government US$714.5b has reinforced its commitment to strengthen economic (nominal) activity through pro-growth policies. These include the Industrial production private sector stimulus targeting residential housing 133.9 loans, economic projects, SME support, infrastructure index development, and investment and export financing. Government US$40.9b Reduced oil prices and the Government’s austerity investment (nominal) measures due to the COVID-19 pandemic are likely to delay major projects and impact domestic demand in the economy. Other key reforms including several privatization projects (such as the Aramco IPO) have been stalled or scaled down. There are also questions over whether the private sector can expand considering recent policies that potentially hinder the employment of expats, which has traditionally been a key engine of private sector growth.

UAE GDP (nominal) US$421.1b

Economic growth is restricted due to the impact of weak oil Government prices on trade and business activity, capital flows, banking expenditure percentage 25.4 sector liquidity, investor confidence and project spending. of GDP As per the new OPEC+ agreement, the UAE cut down it’s oil output to 2.45 million barrels per day (MMbpd). But this CPI 109 failed to stimulate oil prices and led to a further cut in oil production in June 2020 — dragging the growth of oil GDP. The central bank and the UAE Government have announced Inflation (1.93) support packages focused on assisting businesses and households: Domestic demand US$320.3b • An amount of AED256b from the central bank as zero- (nominal) interest collateralized loans for UAE-based banks. In Industrial production addition, benefits such as liquidity and capital buffer 156.3 relief along with deferment of repayment of loans until index the end of 2020 are being offered to banks. Government US$48.9b • Lower business costs through reduced utility bills, investment (nominal) custom and municipality fees and rental rebates. Households will be supported by lower electricity and water charges.

Abu Dhabi is also accelerating planned projects under Ghadan 21 and introducing AED5b (US$1.4b) in credit guarantees for SMEs to fuel the private sector growth.

MENA quarterly banking report: Q2 2020 5 Macroeconomic indicators (cont.)

Qatar GDP (nominal) US$183.4b

The pressure on economic activity and domestic demand Government should gradually ease as pandemic disruption fades and expenditure percentage 31.2 confidence rebounds. Fiscal and external balances have of GDP returned to surplus, but remain highly vulnerable to volatility in hydrocarbon prices. CPI 99.1 The economy is expected to recover from the pandemic in H2 of 2020 and grow steadily over the medium term, amid the ongoing investment ahead of World Cup 2022 Inflation (0.8) and a rise in gas production. Domestic demand The Government announced a three-year stimulus US$158.2b package worth US$20.6b (12.5% of GDP) to the private (nominal) sector to mitigate the effects of the spread of the COVID- Industrial production 19 pandemic. 365.2 index The banks have been resilient, well capitalized and profitable with low levels of NPL. However, their Government US$22.04b excessive exposure to construction and real estate are investment (nominal) immediate pain points and are expected to worsen asset quality in the short term. Worsening demand is also substantiated by the recent downgrade in the credit rating outlook of the banks.

Kuwait GDP (nominal) US$134.7b A renewed thrust to diversify the economy and embark Government on a policy of economic openness to foreign investment is expenditure percentage 55.6 expected to boost the economic prospects in the medium of GDP term. The Government’s large reserves still provide a cushion CPI 114.1 and debt remains low. But in June 2020, credit growth forecast for Kuwait has been lowered from 2.5% to 1.5% because of the recession caused by the COVID-19 Inflation 1.1 pandemic and low oil prices. Domestic demand Due to the ongoing pandemic, a regulatory stimulus US$125.2b package has been offered to local banks, which include a (nominal) reduction in liquidity requirements such as the liquidity Industrial production coverage ratio (LCR), the net stable funding ratio (NSFR), 132.9 and the regulatory liquidity ratio. In addition, they index increased the maximum limits for the negative cumulative Government mismatch and the maximum lending limits to provide US$15.1b financing. investment (nominal) However, challenging macroeconomic condition coupled with oil price shock are anticipated to adversely hit the profitability of the banks. Further delay in passing the new debt law due to the political impasse between the Government and the parliament is fueling further budget constraints and hindrances to tap international debt.

MENA quarterly banking report: Q2 2020 6 Macroeconomic indicators (cont.)

Oman GDP (nominal) US$76.1b Subdued oil prices, OPEC+ production cuts, capacity Government constraints and the need for fiscal measures to expenditure percentage 49.6 contain the budget deficit has put tremendous of GDP pressure on the economy. While the country’s fiscal policy remains restrictive, CPI 113.5 there is also reduced opportunity for banks to finance government projects and loan growth is expected to remain muted. Inflation 0.1 The Central Bank of Oman (CBO) disclosed a draft of Domestic demand policy measures and financial incentives designed to US$70.8b unlock an estimated OMR8b in additional liquidity to (nominal) help businesses impacted by the economic downturn Industrial production and the COVID-19 pandemic threat. The stimulus 128.1 measures primarily targeted at banks and financial index leasing companies (FLCs) enable them to extend a Government measure of financial relief to companies embattled by US$6.1b investment (nominal) the pandemic. Once the COVID-19 pandemic restrictions are lifted, the economy is expected to benefit from stronger external demand in the form of greater non-oil exports, transshipment and tourism. The long-planned phase two of the Khazzan shale gas project will also substantially boost gas production to boost the economic prospect.

Bahrain GDP (nominal) US$40.7b

Despite the economy moving into recession, the first Government instalment (US$10b) of GCC five-year aid package expenditure percentage 24.8 received in late 2018 is expected to help the of GDP Government balance its finances and support various infrastructure projects. However, lower oil revenue CPI 118.5 following the collapse in oil prices will hamper the Government’s ability to combat the impact of the COVID-19 pandemic, particularly as the fiscal position Inflation 1.0 was already weak compared with regional standards before the latest pandemic. Domestic demand Currently, the pipeline for infrastructure investments US$36b remain healthy, with notable projects such as the (nominal) Bahrain Petroleum Company (BAPCO) and airport Industrial production modernization programs in progress. 157.6 index While GDP is expected to fall 1.5%, to overcome that the Central Bank of Bahrain (CBB) issued several regulatory Government US$0.9b measures for retail banks such as concessionary repo investment (nominal) arrangements, reducing cash reserve ratio for a period of six months to control any financial repercussions on the banking sector due to the pandemic. The measures aim to provide more liquidity and flexibility to enable banks to continue providing financing to their customers and will be reviewed at the end of this period by the CBB in consultation with the banking sector.

MENA quarterly banking report: Q2 2020 7 Macroeconomic indicators (cont.)

Egypt GDP (nominal) US$316.4b Government The gradual reopening of the economy from the expenditure percentage 25.7 COVID-19 pandemic lockdown is expected to support of GDP the growth of non-oil sector in the coming months. Egypt’s Stand-By Arrangement (SBA), a support under CPI 288.7 the IMF’s Rapid Financing Instrument (RFI), aims to alleviate the economic impact of the COVID-19 pandemic, helping maintain macroeconomic stability, Inflation 9.15 strengthen the social safety net, and support reforms to spur private sector-led growth and job creation. Domestic demand The SBA will also aim to support health as well as social US$360.3b spending, and also to improve fiscal transparency. (nominal) However, subdued inflation and weak domestic demand Industrial production 133.4 may increase the scope for further key policy rate cuts index in 2020. Subdued exports and foreign direct investment (FDI) Government US$8.5b showcase economic vulnerabilities, which may provoke investment (nominal) the unsettling repercussions of the COVID-19 pandemic.

Jordan GDP (nominal) US$43.6b Government The four-year IMF loan worth US$1.3b is expected to fuel expenditure percentage 28.4 economic activity in the medium term. This loan is of GDP designed to stimulate fiscal reforms, attract FDI and create employment opportunities, particularly among the youth. CPI 100.7 The export industry is anticipated to expand over the coming quarters as the border with Iraq reopens. This will Inflation 0.7 offer lending opportunities to Jordanian banks. Rising export activity and rate cuts by the Central Bank Domestic demand of Jordan, in response to the US Federal Reserve's US$49.4b monetary easing, will support lending growth. (nominal) Austerity measures will limit public sector demand for Industrial production products over the coming years and make banks more 94.7 index reliant on the private sector. Fiscal consolidation and resultant weak domestic demand Government NA will prevent a more robust increase in lending activity investment (nominal) over the coming quarters.

Source: Oxford Economics, FitchSolutions, Thomson ONE, IHS MARKIT CPI: Bahrain, Egypt, Jordan and Oman 2010 (base year) =100; Kuwait 2013 (base year) =100; Qatar and Saudi Arabia 2018 (base year) =100; United Arab Emirates 2014 (base year) =100 Industrial production index: Bahrain, Kuwait, Oman, Qatar and United Arab Emirates 2000 (base year) =100; Egypt 2006/2007 (base year) =100; Jordan 2005 (base year) =100; Saudi Arabia 2010 (base year) =100

MENA quarterly banking report: Q2 2020 8 Banking performance

Section summary Q2 2020 KPIs: a selection of median y-o-y percentage change of figures and ratios. • The COVID-19 pandemic tested the business continuity plans, Return on equity — 10.3% Operating income — 1.0% digital readiness customer Industry median — The median y-o-y percentage change experience and financial post-tax profit upon equity in operating income strength of the MENA banking sector. Q2 2019: 13.4% Q2 2019: 5.4% • Return on equity (ROE) declined on account of fall in revenue and rise in provisions. Operating expense — 3.2% Cost-to-income ratio — 34.0% • Lower offtake from individual The median y-o-y percentage change Ratio of operating expenses to and business segment loans in operating expense operating income due to the challenging economic conditions resulted in Q2 2019: 3.4% Q2 2019: 31.9% subdued revenue growth. • Operating expenses declined marginally on account of Loans — 6.5% NPLs — 17.0% reduction on head counts, branch rationalizations and The median y-o-y percentage change The median y-o-y percentage change ongoing efficiency in total loans in NPLs improvement initiatives. Q2 2019: 3.9% Q2 2019: 10.9% • Total loans grew on back of government-led infrastructure programs and NPLs expanded reflecting the challenging Deposits — 7.8% LDR — 88.3% economic conditions and high profile corporate bankruptcies. The median y-o-y percentage change Ratio of total loans to total deposits in total deposits • Deposits increased on account Q2 2019: 89.1% reduced spending due to the Q2 2019: 6.1% COVID-19 pandemic lockdowns and volatile capital markets.

Source: Company filings

MENA quarterly banking report: Q2 2020 9 Banking performance

ROE Q2 2019–Q2 2020 Industry profitability declined considerably

Subdued revenue growth coupled with higher provisions 25.0% impacted the bottom-line growth resulting in a substantial fall in ROE across the MENA region. 19.7% 20.0% In Q2 2020, median industry ROE declined 310 basis 15.6% 15.4% points (bps) y-o-y to 10.3%. Significant reduction was 14.4%

15.0% 13.6%

13.2% witnessed in KSA followed by the UAE and Egypt. Egyptian 12.6% banks recorded the highest ROE for Q2 2020 followed by 10.8% 10.6% 10.1% 9.8% Qatar, while banks in Kuwait were least profitable in the 10.0% 8.8% region. 6.5%

4.1% Profitability is likely to be further impacted by increasing 5.0% 3.5%

2.3% provisions due to the continuing slowdown in economic activity. 0.0% KSA UAE Qatar Oman Egypt Kuwait Jordan Bahrain

Q2 2019 Q2 2020

Operating revenue and expenses growth: Q2 2020 Cost management remains critical to operating 70.00% performance

There is a renewed focus on banks across the MENA region Bahrain Oman 50.00% to grow revenue with consistent cost control measures. Among the peer groups, only Egyptian banks recorded

30.00% revenue growth in excess of expense growth. Focus of the banks will be on securing new loan Egypt UAE originations by deepening client relationships and winning 10.00% new business, while seeking to control and manage the Jordan KSA rising costs with more digitalization and process -50% -30% -10% 10% 30% 50% streamlining. Kuwait -10.00% Qatar

-30.00%

Operating income(percentage) -50.00%

Operating expense (percentage)

Source: Company filings

MENA quarterly banking report: Q2 2020 10 Banking performance

Cost income ratio: Q2 2019–Q2 2020 Industry profitability declined considerably Operating income for the banks in the region expanded 60.0% marginally by 1% to US$16,366.2m. While the operating expenses expanded by 3.2% to US$5,568.9m in Q2 2020. 49%

50.0% 46.3% 46.3% 45.2% The median industry cost-to-income ratio increased from 42.1% 40% 31.9% in Q2 2019 to 34.0% in Q2 2020.

40.0% 36.3% 34.7% 34.6% 33.8%

32.9% The UAE and Jordan recorded sharp jump in cost-to- 29.5% 29.3% 28.6% income ratio on account of higher loan restructuring and 27.2% 30.0% 27.3% impairments. In an environment of weak loan growth, deteriorating asset quality and margin pressure due to low 20.0% interest rate containing the cost income ratio will be one of the focus areas for banks in the coming quarters. 10.0% The COVID-19 pandemic and the subsequent lockdowns have impacted the revenue growth prospects across all 0.0% product categories. As a result, efficiency control will play KSA UAE an important role in the near term. With social distancing Qatar Egypt Oman Kuwait Jordan and work from home becoming the new normal in the Bahrain Q2 2019 Q2 2020 industry, banks are embracing digital transformation and technology adoption to expand customer base, reduce branch network and head count.

Industry operating revenues (US$m) Q2 2019–Q2 2020 Industry operating expense (US$m) Q2 2019–Q2 2020

1,400.0 1,309.2 1,290.0

5,000.0 4,730.7 1,267.8 1,260.3 4,554.4 4,445.4

4,500.0 4,193.6 1,200.0

4,000.0 1,047.8 990.7 1,000.0 3,500.0 3,030.6 3,017.3 3,000.0 800.0

2,500.0 590.4 578.8 600.0

2,000.0 1,703.4 1,481.0 315.8 1,500.0 400.0 315.0 289.7 279.6 993.9 267.6 257.7 848.5 747.4 719.0 1,000.0 702.1 171.8 591.5 587.2 575.5

200.0 115.8 500.0 0.0 0.0 KSA UAE KSA UAE Qatar Qatar Oman Egypt Oman Egypt Kuwait Kuwait Jordan Jordan Bahrain Bahrain Q2 2019 Q2 2020 Q2 2019 Q2 2020

Operating income growth by region Q2 2019–Q2 2020 Operating expense growth by region Q2 2019–Q2 2020 Q2 2019 Q2 2020 Q2 2019 Q2 2020

KSA 11.9% 2.5% KSA 3.3% –0.5% UAE 21.6% –11.4% UAE 2.4% 6.9% Qatar 5.2% –0.4% Qatar 5.8% –2.6% Kuwait –0.3% –13.1% Kuwait 2.0% –9.0% Oman 5.7% 43.5% Oman 3.8% 46.9% Bahrain –0.4% 33.0% Bahrain –0.3% 46.1% Egypt 21.4% 19.6% Egypt 48.4% 11.4% Jordan 3.5% –20.0% Jordan 3.6% –1.9%

Source: Company filings

MENA quarterly banking report: Q2 2020 11 Banking performance

NII (US$m) Q2 2019–Q2 2020 NII increased marginally from Q2 2019

Aggregate NII expanded marginally by 1.3% y-o-y from 3,500.0

3,174.6 US$11.7b in Q2 2019 to US$11.8b in Q2 2020. 3,089.0 2,974.2

3,000.0 2,750.5 Moderate expansion of NII is mainly on account of loan volume growth which was offset by low interest rate 2,337.9 2,500.0 2,334.2 prevalent in the region.

2,000.0 Going forward, a weak economic outlook and any further rate reduction by central banks are likely to 1,500.0 1,186.7

1,141.3 negatively impact loan growth and interest margins.

1,000.0 671.8 614.9 593.7 582.2 585.0 531.7 519.5 516.6 500.0 NII growth by region Q2 2019–Q22020 0.0 Q2 2019 Q2 2020 KSA UAE Qatar Oman Egypt Kuwait Jordan

Bahrain KSA 9.2% 2.8% Q2 2019 Q2 2020 UAE 1.7% 8.1%

Qatar 4.6% 0.2% Net profits declined on back of higher provisions Kuwait –5.1% –3.8% The net profit of 33 listed banks in MENA declined by –31.9% as compared with 19.2% growth recorded in Q2 2019. Oman 48.7% 0.5% With exception of Oman, all the other seven MENA Bahrain –1.4% –22.7% regions recorded fall in net profit. Among the GCC regions, Kuwait and the UAE recorded the largest fall of –73.6% and –44.8% respectively, largely due to Egypt 55.6% 19.0% challenging economic conditions posed by the COVID- 19 pandemic, lower benchmark interest rate, surge in Jordan 2.9% –10.4% loan restructuring and impairments.

Net profit (US$m) Q2 2019–Q2 2020 Trend of y-o-y net profit growth Q2 2019 Q2 2020

3,500.0 KSA 9.4% –14%

3,000.0 2,876.5 UAE 31.5% –44.8% 2,500.0

1,942.2 Qatar 6.5% –18% 2,000.0 1,675.6 1,591.1 1,587.2

1,500.0 1,311.7 Kuwait 18.7% –73.6%

1,000.0

607.0 Oman 7.4% 3% 296.9 293.7

500.0 265.4 248.3 244.6 232.7 226.7 160.4

23.7 Bahrain 197.5% –18% 0.0

KSA UAE Egypt 23.4% –10% Qatar Oman Egypt Kuwait Jordan Bahrain

Q2 2019 Q2 2020 Jordan –5.4% –90%

Source: Company filings

MENA quarterly banking report: Q2 2020 12 Banking performance

Total assets (US$b) Q2 2019–Q2 2020 Total assets continued to grow on back of economic recovery programs 700.0 MENA banks continued to strengthen their aggregate 600.0 586.1 balance sheets during Q2 2020, as banks in all eight countries reported increase in total assets during Q2 490.6 500.0 2020. Aggregate total assets increased by 11.8% y-o-y to 420.3 411.7

380.6 US$1.9t as compared with US$ 1.7t at the end of Q2 2019 400.0 367.6 with UAE-listed banks growing their assets base at the 300.0 fastest pace of 19.5% y-o-y followed by Saudi banks that reported a y-o-y growth of 14.3%. Total loans as a 197.0 188.7 200.0 percentage of assets declined by 120bps to 61.6% in Q2 106.4 104.4 2020. 68.2 66.1 65.8 100.0 63.0 42.5 36.8 Aggregate loans increased by 9.6% y-o-y to US$1.2t at the 0.0 end of June 2020 compared with US$1.1 in June 2019. The UAE banks led the pack among other GCC peers KSA UAE Qatar Oman Egypt reporting growth of 14.1% in Q2 2020 followed by KSA at Kuwait Jordan Bahrain 12.5%. Q2 2019 Q2 2020 The credit demand from individual and hydrocarbon segments remained flat while borrowings from government sector witnessed an offtake to support ongoing infrastructure development programs. Total asset growth by region Q2 2019–Q2 2020 Loans (US$b) Q2 2019–Q2 2020 Q2 2019 Q2 2020

KSA 5.3% 14.3% 400.0 342.2 UAE 10.2% 19.5% 350.0 300.0 295.5

300.0 273.0

Qatar 4.4% 8.2% 264.2

250.0 234.8 Kuwait 4.7% 4.4% 200.0 Oman 3.2% 3.2% 150.0 110.8 Bahrain 8.1% 1.9% 105.8 100.0 51.4 51.5 51.1 51.3 34.5

Egypt 19.6% 15.5% 34.2 50.0 18.7 16.4

Jordan 2.6% 4.5% 0.0 KSA UAE Qatar Oman Egypt Kuwait Jordan Bahrain

Loan to asset ratio Q2 2019–Q2 2020 Q2 2019 Q2 2020

90.0% Loans growth by region Q2 2019–Q2 2020 77.0% 74.6% 80.0% 74.4% 71.8% 70.6% Q2 2019 Q2 2020 65.9% 70.0% 65.5% 61.4% 58.7% 58.7% 60.0% KSA 4.1% 12.5% 51.0% 50.3% 49.6% 49.3% 47.9% 50.0% 47.0% UAE 5.0% 14.1% 40.0% Qatar 3.7% 8.2% 30.0%

20.0% Kuwait 3.4% 4.7% 10.0% Oman 5.5% 0.2%

0.0% Bahrain –0.4% 0.5% KSA UAE Qatar Oman Egypt Egypt 17.4% 14.5% Kuwait Jordan Bahrain Jordan 2.6% 0.7% Q2 2019 Q2 2020 Source: Company filings

MENA quarterly banking report: Q2 2020 13 Banking performance

Total NPL (US$b) Q2 2019–Q2 2020 Asset quality deteriorated considerably

Aggregate NPL stood at US$38.2b in Q2 2020, compared

20.0 with US$31.1b in Q2 2019. 18.1 18.0 UAE banks witnessed the highest increase in NPL in

16.0 Q2 2020 due to the higher exposure to real estate sector

13.3 and delinquencies due to the impacts from the COVID-19 14.0 pandemic. 12.0 Overall, NPL is expected to increase in the quarters ahead, 10.0 driven primarily by the subdued oil prices and challenging

8.0 6.8

6.2 macroeconomic condition. However, accommodative

6.0 4.7 monetary policies of central banks and payment deferrals 3.8 4.0 are likely to support the overall loan quality and funding in 2.3 2.2 2.1 2.0 1.8 1.8 1.6 1.5

2.0 0.6 the short term. 0.6

0.0 KSA UAE Qatar Kuwait Oman Bahrain Egypt Jordan

Q2 2019 Q2 2020

NPL growth by region Q2 2019–Q2 2020 Q2 2019 Q2 2020 NPL to total loan Q2 2019–Q2 2020

KSA 10.3% 23.8%

0.1 5.3%

UAE 9.0% 35.8% 5.3%

0.1 4.6% 4.4% Qatar 11.5% 10.3% 4.4% 4.3% 4.1%

0.0 3.7% 3.5%

Kuwait –7.3% 36.7% 3.4%

Oman 9.1% 25.0% 0.0 2.3% 2.3% 1.8% 1.8%

0.0 1.6%

Bahrain 13.1% –3.2% 1.4%

Egypt – 3.8% 0.0

Jordan 22.8% –12.0% 0.0 KSA UAE Qatar Kuwait Oman Bahrain Egypt Jordan

Q2 2019 Q2 2020

Source: Company filings

MENA quarterly banking report: Q2 2020 14 Banking performance

Deposits (US$b) Q2 2019–Q2 2020 Deposits increased on back of lower spending and market volatility 450.0 Aggregate banking deposits increased to US$1.3t in Q2 394.9 400.0 2020, from US$1.1t in Q2 2019, recording a growth of 6.2%. 350.0 330.3 313.6 Region-wise, the UAE reported the highest growth of 300.0 274.7

239.3 19.5% followed by KSA at 14.2%. Overall, the deposit base 250.0 220.3 of the banks in the region is expected to increase in the 200.0 coming quarters. Also, the bank deposits are perceived as 129.0

150.0 120.5 a safer alternative to volatile capital markets. Even so, government withdrawals of deposits to cover wide fiscal 100.0 67.1 63.4 49.5 48.4 47.8 46.5 deficits remain a risk. 34.8 50.0 30.8 Use of online banking channels and digital banking 0.0 alternatives have increased since the COVID-19 pandemic. KSA UAE Qatar Kuwait Oman Bahrain Egypt Jordan Despite being a new entrant in the region with relatively Q2 2019 Q2 2020 moderate growth, online-only banks are gaining traction and large banks are gradually losing deposit market share to online-focused banks providing best-in-class digital experience. Going forward, banks with the strong digital solutions are likely to benefit from this behavioral shift. Deposits growth by region Q2 2019–Q2 2020 The loan to deposit ratio (LDR) declined marginally to Q2 2019 Q2 2020 88.3% in Q2 2020 as compared with 89.1% in Q2 2019. The ratio remains the highest in the case of Qatar at KSA 5.6% 14.2% 118.4% followed by Oman at 99.7%. Banks in the UAE and KSA with LDR of 81.9% and 82.7% have considerable UAE 7.3% 19.5% bandwidth to accommodate any increase in credit demand. Qatar 4.7% 8.6%

Kuwait 6.5% 7.1%

Oman 2.1% 3.5%

Bahrain 9.7% –5.5%

Egypt 16.3% 13.0%

Jordan 1.7% 4.3%

Loan to deposit ratio Q2 2019–Q2 2020

1.4 118.8% 118.4% 1.2 103.2% 99.7% 1.0 89.1% 88.3% 87.8% 85.9% 83.2% 82.8% 82.7% 81.9% 78.8%

0.8 72.4% 67.4% 64.5%

0.6 49.6% 49.1%

0.4

0.2

0.0 KSA UAE Qatar Kuwait Oman Bahrain Egypt Jordan

Q2 2019 Q2 2020

Source: Company filings

MENA quarterly banking report: Q2 2020 15 Sector insights

Sector insights Banks in MENA region faced a rough Q2 2020 due to the further spread of the COVID-19 pandemic. Many banks activated resilience measures to combat the impact of the situation. In general, the following trends were identified across the region: 1 2 3

Relief A few M&A Increased measures to decisions digital bank being pushed adoption customers by to the back central banks burner

MENA quarterly banking report: Q2 2020 16 Increased digital adoption

Q2 2020 has witnessed multiple digital adoption or implementation in banks in the MENA region in a bid to tackle the pandemic and further improve customer experience. After the initial shock, banks are now driving digital adoption by focusing on contactless services such as digital payments, digital wallets, digital signing, etc. With more customers getting accustomed to digital mode of interactions, banks consider this to be the opportune moment for pushing their digital agenda. Many interesting deployments occurred during Q2 2020, and this trend could hasten digital adoption among banks in the region. Mashreq Bank in the UAE and Burgan Bank in Kuwait has implemented artificial intelligence (AI) powered virtual assistants with a view to enhance customer experience. The UAE has been at the forefront of digital adoption with multiple initiatives being launched including Abu Dhabi Islamic Bank’s (ADIB) blockchain solution for trade distribution, First Abu Dhabi Bank’s (FAB) portal for digitally signing documents and Emirates NBD’s contactless export trade collections. A couple of instances of digital wallet adoption (Al Rajhi Bank and Qatar Development Bank ) and mobile app powered international transfers from Oman (Bank Dhofar and National Bank of Oman) were also witnessed during the COVID-19 pandemic time.

Relief measures for bank customers by central banks

Central banks across the region were quick to understand the impact on bank customers and jumped in with measures that would provide relief to them. The key measure taken was the deferment of payment of loans. Though in varying degrees, this step was taken by all the central banks in the countries considered. The relief was provided for a period of three to six months and some of them were subject to specific conditions. Saudi Arabia provided deferring of loan repayments for health care workers and SMEs for a period of three months, whereas UAE allowed banks to reach an agreement with their customers on the deferred period and the repayment of interests during the deferred period. Qatar offered a six-month relaxation period for affected sectors and provided liquidity by infusing QAR50b at zero interest rate. Central banks in Kuwait and Egypt offered deferment of loans for a period of six months, whereas Oman deferred payments for three months. Jordan issued several measures which included restructuring of loans to individuals and companies and reduction of interest rates by 1.5% to SMEs. All these measures are expected to increase the confidence and build trust during the tough times and also help in enhancing economic activities in the region.

A Few M&A decisions were pushed to the back burner

Though the COVID-19 pandemic wreaked havoc on customer interactions and other banking transactions, it did not quite create a wreckage as far as M&A activities are concerned. However, there were few instances in which the planned or announced M&A activities were postponed owing to the uncertainties in the market. Some of such major deals include FAB’s and Bank Audi’s Egypt subsidiary’s acquisition talks and Kuwait Finance House’s (KFH) shelving of plans to acquire Bahrain’s Ahli Bank till December 2020. However, few other M&A activities were initiated or completed during this period. The notable ones among them being the planning of merger between National Commercial Bank (NCB) and Samba Financial Group in Saudi Arabia, the initiation of talks between Masraf Al Rayan (MAR) and Al Khaliji in Bahrain and the acquisition of 51% stake in Kenya’s Mayfair Bank by Egypt’s Commercial International Bank (CIB).

Source: New articles

MENA quarterly banking report: Q2 2020 17 Annexure

Glossary Name of the bank Acronym Region

The National Commercial Bank NCB

Al Rajhi Banking and Investment Corporation Al Rajhi

Riyad Bank Riyad Bank Kingdom of Saudi Arabia

Saudi Investment Bank SIB

Banque Saudi Fransi BSF

First Abu Dhabi Bank FAB

Emirates NBD Bank ENBD

Abu Dhabi Islamic Bank ADIB United Arab Emirates

Dubai Islamic Bank DIB

Mashreq Bank PSC MASQ

Qatar National Bank QNBK

Qatar Islamic Bank QIBK

Masraf Al Rayan MARK Qatar

The Commercial Bank CBQK

Doha Bank DHBK

MENA quarterly banking report: Q2 2020 18 Name of the bank Acronym Region

National Bank of Kuwait NBK

Kuwait Finance House KFH Kuwait Commercial Bank of Kuwait CBK

Gulf Bank GBK

Bank Muscat BKMB

Bank Dhofar BKDB

National Bank of Oman NBOB Oman

Sohar International Bank BKSB

HSBC Bank Oman HBMO

Ahli United Bank AUB

Gulf International Bank GIB Bahrain Bank of Bahrain and Kuwait BBK

Al Baraka Banking Group BARKA

Commercial International Bank CIB Egypt QNB Alahli QNBA

Arab Bank Group ARBK

Arab Jordan Investment Bank AJIB Jordan

The Housing Bank for Trade and Finance HBTF

Source: Company filings

MENA quarterly banking report: Q2 2020 19 Ratings Name of the bank Fitch Moodys S&P

NCB A– A1 –

Al Rajhi A– A1 –

Riyad Bank BBB+ – BBB+

SIB BBB+ A3 BBB

BSF BBB+ A1 BBB+

FAB AA– Aa3 AA–

ENBD A+ A3 –

ADIB A+ A2 – DIB A A3 –

MASQ A Baa2 BBB+

QNBK A+ Aa3 A

QIBK A A1 A

MARK – A1 –

CBQK A A3 BBB+

DHBK A A3 –

NBK AA– Aa3 A

KFH A+ A1 –

CBK A+ A3 –

GBK – A3 A–

BKMB BB Ba2 BB–

BKDB BB– Ba3 –

NBOB BB– B1 –

BKSB B+ B1 –

HBMO BB+ Ba1 –

AUB BBB– A2 BBB

GIB BBB+ Baa1 –

BBK BB– – –

BARKA – – BB

CIB B+ B2 -

QNBA B+ Ba2 –

ARBK BB– Ba2 BB+

AJIB – – –

HBTF – – -

Source: Company filings

MENA quarterly banking report: Q2 2020 20 Data tables Net profit amount (US$m) Name of the bank Q2 2018 Q2 2019 Q2 2020

NCB 577.7 716 556.5

Al Rajhi 659.7 687.9 649.4

Riyad Bank 224.6 399.9 283.4

SIB 89.8 (75.9) 69.9

BSF 224.3 214.3 116.4

FAB 832.9 876.9 656.5

ENBD 716.3 1,290 547.4

ADIB 155.9 171.5 86.5

DIB 329.8 376.5 274.2

MASQ 153.3 161.6 23.1

QNBK 1,007.1 1,045 775.7

QIBK 192.3 203.3 203

MARK 146.9 146.6 147.4

CBQK 123.7 138.2 137.1

DHBK 24.5 58 48.5

NBK 304.1 351.9 108.4

KFH 168.9 184.7 41

CBK (14.4) 30.2 0.9

GBK 52.8 40.2 10.1

BKMB 116.6 124.2 179.5

BKDB 29.5 18.5 18.2

NBOB 32.80 33.3 13.5

BKSB 13.20 21.9 18.2

HBMO 18.9 28.8 3.3

AUB 182.70 184.7 157.1

GIB (170) 26.9 (41.6)

BBK 47.8 53.1 38.7

BARKA 39.3 32.2 90.3

CIB 134.4 162.3 143.1

QNBA 103.7 131.4 122.3

ARBK 218.5 225.2 4.1

AJIB 5.3 4.9 5.1

HBTF 38.8 18.2 14.5

MENA quarterly banking report: Q2 2020 21 Data tables Total assets (US$m) Name of the bank Q2 2018 Q2 2019 Q2 2020

NCB 121,158.3 127,617.8 148,556.6

Al Rajhi 92,910.9 98,522.8 111,337.9

Riyad Bank 57,456.5 65,620.5 78,657.4

SIB 27,185.7 26,119.8 27,886.4

BSF 50,374.9 49,746.4 53,832.6

FAB 188,308.6 210,988.2 235,771.9

ENBD 130,004.2 146,421.4 189,023.4

ADIB 33,470.8 33,938.1 33,878.1

DIB 58,712.5 62,121.0 80,260.6

MASQ 34,575.9 37,143.5 47,184.9

QNBK 232,282.1 243,519.4 266,990.9

QIBK 41,877.0 42,461.7 45,540.1

MARK 27,590.2 28,165.7 30,031.5

CBQK 38,423.0 38,809.1 39,462.5

DHBK 24,487.1 27,685.4 29,675.6

NBK 88,799.7 91,797.0 96,301.9

KFH 58,087.1 61,747.3 66,782.9

CBK 14,048.5 15,394.5 14,364.1

GBK 19,252.4 19,798.0 19,570.4

BKMB 29,963.0 31,177.2 32,404.4

BKDB 10,998.3 10,885.0 10,679.7

NBOB 8,958.2 9,308.4 9,592.9

BKSB 7,816.7 8,366.4 9,308.0

HBMO 6,359.7 6,399.9 6,240.7

AUB 34,420.8 38,046.2 40,078.70

GIB 27,742.4 31,594.5 29,452.2

BBK 9,727.6 10,502.7 10,696.5

BARKA 24,639.6 24,241.6 26,127.0

CIB 17,455.9 21,636.8 24,774.9

QNBA 13,279.8 15,127.1 17,704.9

ARBK 47,230.6 48,256.6 51,579.9

AJIB 2,701.5 2,830.9 2,854.0

HBTF 11,474.6 11,894.8 11,374.4

MENA quarterly banking report: Q2 2020 22 Data tables Loans (net) (US$m)

Name of the bank Q2 2018 Q2 2019 Q2 2020

NCB 70,940.1 73,659.5 84,312.6

Al Rajhi 61,048.5 63,588.8 73,284.9

Riyad Bank 38,480.6 43,013.0 50,020.2

SIB 15,827.5 15,242.5 15,631.8

BSF 32,747.4 33,123.5 36,185.3

FAB 93,840.9 99,650.5 104,704.0

ENBD 86,134.3 91,932.3 120,585.4

ADIB 21,076.7 21,751.1 22,577.0

DIB 38,615.9 40,901.3 54,532.6

MASQ 18,428.1 19,255.1 20,817.7

QNBK 165,900.2 172,647.0 191,338.1

QIBK 27,538.7 29,377.8 30,832.8

MARK 19,982.4 20,437.9 21,363.8

CBQK 23,115.0 22,930.9 22,815.5

DHBK 15,833.6 16,259.1 16,964.1

NBK 50,189.5 53,411.3 57,011.8

KFH 31,514.0 30,424.8 32,005.7

CBK 7,296.7 8,446.7 7,458.9

GBK 13,253.6 13,468.2 14,275.4

BKMB 22,186.9 23,577.2 23,305.6

BKDB 8,462.7 8,599.3 8,566.6

NBOB 6,928.8 7,309.6 7,349.5

BKSB 5,709.5 6,264.3 6,342.1

HBMO 3,628.6 3,633.4 3,795.7

AUB 19,601.6 20,302.3 21,128.7

GIB 10,177.1 9,837.4 9511.4

BBK 4,815.3 4,386.3 4,251.1

BARKA 14,144.7 14,061.3 15,071.1

CIB 5,988.0 6,646.8 7,488.1

QNBA 6,903.3 8,498.3 9,788.9

ARBK 23,635.4 24,062.7 24,285.4

AJIB 6,074.3 6,153.5 5,767.4

HBTF 1,106.3 1,084.0 1,215.7

MENA quarterly banking report: Q2 2020 23 Data tables Deposit (US$m)

Name of the bank Q2 2018 Q2 2019 Q2 2020

NCB 82,398.0 87,302.6 101,399.0

Al Rajhi 75,851.7 80,707.6 91,960.5

Riyad Bank 42,901.0 50,235.2 61,671.5

SIB 19,012.3 17,822.2 17,124.5

BSF 39,857.5 38,614.7 41,441.4

FAB 126,168.3 138,681.0 155,936.6

ENBD 91,209.7 99,835.9 125,481.0

ADIB 27,991.1 28,016.8 26,856.6

DIB 41,189.6 42,684.2 59,773.1

MASQ 21,179.2 21,129.8 26,832.4

QNBK 168,591.4 177,335.9 195,619.4

QIBK 5,009.2 4,383.6 4,464.0

MARK 1,824.3 2,076.4 2,342.9

CBQK 20,869.3 21,203.9 21,448.2

DHBK 14,169.6 15,276.5 15,387.7

NBK 49,984.7 53,288.6 58,616.5

KFH 39,376.1 42,281.7 47,329.0

CBK 7,521.2 7,881.2 7,574.2

GBK 16,307.6 16,967.4 15,556.8

BKMB 22,472.8 23,539.1 24,594.3

BKDB 8,105.6 7,507.4 7,272.5

NBOB 6,460.6 6,464.3 6,842.9

BKSB 4,479.5 5,056.6 5,821.1

HBMO 5,322.2 5,264.5 4,972.3

AUB 27,546.8 29,158.4 29,296.4

GIB 20,899.0 24,378.6 20,346.9

BBK 7,423.8 7,941.1 7,490.1

BARKA 5,333.5 5,640.7 6,264.0

CIB 15,237.1 18,380.9 20,586.8

QNBA 11,272.00 12,452.70 14,245.60

ARBK 34,650.5 34,866.6 37,626.8

AJIB 2,024.0 2,258.1 2,185.8

HBTF 9,027.7 9,336.8 8,634.7

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