GCC banks on the rise

According to a recent study by The Boston Consulting Group BCG, Middle East banking revenues continued to grow and reach double-digit rates in 2014. In this exclusive interview, Dr. Reinhold Leichtfuss, Senior Partner and Managing Director, BCG talks us through the GCC banks’ performance highlighting the findings of the latest BCG GCC Banking Performance Index.

 

 

 

What were the key findings of the BCG GCC Banking Performance Index in 2014?

 

Last year was a good year for banks in the GCC as they continued their double-digit growth momentum with an increase of exactly 10% in revenues and 14.7% in profits. The high profit growth is due to the fact that loan loss provisions dropped by 9%, which was the biggest drop that we have seen since 2010.

 

With this strong double-digit development, GCC banks have continued to develop much stronger than international banks since the financial crisis, both in revenues and in profits. As of today, many international banks have not yet recovered to their pre-crisis levels in profits.

 

While 90% of the banks were able to grow and 50% even double digit, 10% of the banks incurred negative revenue growth rates.

 

Why are GCC banks developing much better than international banks?

Overall, international banks have been significantly affected by the financial crisis. For example in 2008, they not only experienced a drastic drop in profits but in revenues as well. In fact, our sample of large international banks has reached a profit level of 62 in 2014 (with 2005 as the base year at 100). In comparison, GCC banks reached the profit level of 197 in 2014, doubling their profits.

This shows that the banking systems in the mature markets are developing in line with a much lower GDP growth in their countries. Last but not least, GCC banks work on average with a Cost Income Ratio (CIR) of 37% - while international banks work with a CIR between 55% and 70%. Thus, they are achieving much higher profits in relative terms.

 

 

What are the challenges faced by the banks in the region and what would be the best way to approach them?

I have already addressed one of these challenges, namely that the CIR is steadily increasing as a result of several investment needs, for example in IT infrastructure and implementation of strategies. Other challenges are related to the fact that banks are always in need of expertise and human capital in risk, sales, and technology. Also, attracting and retaining top personnel and talent in today’s market is no easy feat. Lastly, the wave of new financial services regulations that have washed over the industry poses a serious challenge to banks – as many of them require additional capabilities to actually implement them.

 

The BCG report says that loan-loss provisions dropped in all GCC countries last year except Oman. How do you explain that?

Over the past six years, banks in the GCC have managed to build provisions against non-performing loans. Today, as a result, many GCC banks have reached high coverage ratios of close to 100%. Banks in the UAE reacted early in 2009, while some other countries had their peaks in provisioning a little later.

 

What do you expect for retail banking revenues in the GCC this year? What about corporate banking revenues?

As mentioned in BCG’s study, in 2014, retail banking revenues in the GCC experienced a further uptick of 7.9 percent, largely due to an increase in Qatar (12.5 percent), the UAE and Bahrain. Kuwait witnessed a healthy retail banking revenue growth (6.3 percent), followed by Saudi banks with 3.4 percent. Additionally, the corporate segment reached a new top index level in revenues in 2014 by growing 8.8 percent. In 2014, banks in Saudi Arabia also excelled in corporate banking revenues.

 

Based on these figures, we anticipate that both the retail banking and corporate banking segments will continue to exhibit growth – as long as falling oil prices don’t hinder government spending. Of course, the countries with the lowest growth rates in 2014 have a higher chance of witnessing strong growth in 2015.  

 

What are leading banks in this region providing to the GCC economies?

Leading banks in this region are providing GCC states with a robust financial services infrastructure tailored to consumers and corporate entities. The largest banks in each country play a pivotal role in accomplishing this; they usually have close links with the government.

 

There is no doubt that these leading banks are essential to the economic development of these countries; they help to finance their physical infrastructure and enable trade transactions between national and international corporations. In addition to this, banks typically employ a large number of nationals – which, in turn, helps to boost employment figures and meet nationalization quotas.

 

How could the IT revolution - being a top priority to certain banks in the region- enhance the banking systems?

I am assuming that you are talking about the wave of digitization and big data that is currently sweeping banks across the globe. In recent years, the rise of new technologies has, of course, enabled new levels of digitization, which we experience predominantly via our mobile devices.

In some Middle East countries, mobile banking has already overtaken online banking. After all, mobile banking makes customers feel like their bank is at their service anywhere, anytime.

 

A digitization strategy, however, should be implemented across the entire end-to-end process as this will help to enhance the efficiency of GCC banks. Also, while it is true that GCC banks currently enjoy a low CIR (37%), this ratio has, in the last decade, increased by four percentage points. 

 

Where do you see scope for future growth?

The GCC economies have been growing at a high rate, faster than mature economies. Today, there is still ample room for future growth, not only in the consumer and corporate segments but also in areas such as treasury and capital markets. Because of the current needs and stage of development of GCC economies, the small and medium corporate customer segments boast strong growth potential.

 

Finally, in the near future, an increasing number of banks will be expanding internationally and will increase their share of international revenue – as a percentage of their total revenue. Achieving this successfully and profitably will certainly also be a challenge. 

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