According to Moody's Investors Service, the profitability of Islamic banks' in the Gulf cooperation Council (GCC) region will outpace that of their conventional peers for the second consecutive year in 2017. Islamic banks will maintain stronger margins in 2017, primarily as a result of their low funding costs, which reflect their reliance on stable current and savings account balances. Islamic banks also tend to have higher asset yields, given their focus on retail and the real estate related lending. Moody's expects that Islamic banks will retain a margin advantage of about 40 basis points over conventional banks in 2017. Moody's analyst Nitish Bhojnagarwala says conventional banks will continue to beat Islamic peers in terms of cost efficiency. Islamic banks are investing in branch network expansion, while conventional banks have already established their branch networks.
According to Moody’s Investors Service, a proposed merger between three Qatari banks would help “rebalance” the banking sector in the country. The merger is currently at due diligence stage and will be subject to approval by the relevant authorities. The merged entity between Masraf Al Rayan, Barwa Bank and International Bank of Qatar would create the largest Islamic bank and second largest lender in Qatar. Total assets would amount to around QAR173bn ($48bn) and the market share would be around 14%. Moody’s assistant vice president Nitish Bhojnagarwala said Islamic banking asset growth has outpaced conventional banking in Qatar, as demonstrated by a 21% compound annual growth rate of loans for Islamic banks between 2011 and 2016 compared with 14% for the conventional banks. The GCC is witnessing a consolidation in the banking sector, with the two largest lenders in Abu Dhabi also currently preparing to merge.
Moody's announced that Al Rajhi Bank's dominant Islamic retail franchise will continue to drive a strong financial performance into 2017. Despite pressure on the Saudi economy from lower oil prices, Al Rahji's retail focus delivers solid margins and asset quality. Moody's analyst Nitish Bhojnagarwala said Al Rajhi's Islamic retail portfolio drives higher financing yields and stronger margins than its peers both in Saudi Arabia and the Gulf Co-operation Council (GCC). Coupled with a modest cost base and relatively lower provisioning, this generated a solid return on assets of 2.5% for the first six months of 2016. Furthermore, strong profits, combined with solid retention rate, provide healthy internal capital generation for the bank, which had a tangible common equity ratio of 19.8% as of June 2016.