The profitability and the topline of Islamic banks in the Gulf Cooperation Council (GCC) are expected to be less affected by Covid-19 compared to those of conventional lenders in the region, according to Kamco-Invest.
The growth in Islamic banks’ assets and deposits has been around 8% in 2019 vs 2018 whereas it was more than 10% in conventional banks, the Kuwait-based entity said in its latest report.
“As a result, the Covid-19 led decline in economic activity in the near term will affect conventional banks more than the Islamic banks in terms of growth rates. Also, based on the higher loan-to-deposit ratios, the impact on profitability of Islamic banks is expected to less than that of conventional banks,” it said.
This is particularly true in the case of Saudi Arabia and Qatari Islamic banks that have a much higher utilisation of deposits as against the UAE-based lenders that have a higher ratio for conventional banks.
Moreover, at the aggregate regional level, the loan-to-deposit ratio of the GCC-based banks is much conservative as compared to global averages.
“This gives them additional capacity to lend at times of crisis as well as additional buffers to withstand stress in the sector,” Kamco-Invest said.
Highlighting that the Gulf Islamic banks continue to outweigh their conventional counterparts in several metrics; it said Shariah-principled banks in Saudi Arabia and Qatar continue to boast higher utilisation of assets, with a loan-to-deposit ratio greater than conventional banks.
Qatari Islamic banks boasted an even higher ratio of 96.8% during Q1-2020 against 90% in the case of conventional banks.
A higher loan-to-deposit ratio was also reflected in the profitability of Islamic banks in the region, the report said.
“We believe that the Covid-19 pandemic will affect both conventional and Islamic banks in terms of overall lending activity in the region. That said, the health of the individual banks would determine the level of impact,” it said.
The GCC banks are relatively in a better position to withstand the near-term impact of the Covid-19 due to adequate capital and liquidity buffers, it said, adding in the near term, the pandemic would affect conventional banks more than the Islamic lenders in terms of growth rates.
The (regional) banking industry is expected to play a key role in the revival of the economy from the present crisis and would to stand benefit from the private sector’s increased participation in the overall economy, it said.
The GCC banking sector reported healthy loan growth during the first quarter of this year as the economic impact of Covid-19 was felt close to the end of the quarter.
The pandemic has led to delayed financial reporting for banks in Kuwait and Bahrain; hence this report only includes analysis of banks in Saudi Arabia, the UAE, Qatar and Oman.
The banks in these four GCC countries showed strengthening balance sheets with continued assets growth during Q1-2020.
Asset growth during the quarter was once again supported mainly by the Islamic banks, whose assets grew 4.6% quarter-on-quarter against 2.3% for conventional banks.
The report said the financial regulators across the GCC announced several policy measures to deal with the Covid-19 crisis.
A significant element of these efforts involved the banking sector through postponing installments, waiving numerous charges, and supporting the vital small and medium enterprises sector.
A majority of the GCC banks are well capitalised and have strong balance sheets, insulating the sector from the additional stress from the pandemic, it stressed.