GCC banks’ corporate banking divisions are at peak levels in terms of revenues and net profits, and have even crossed the pre-crisis levels seen in 2008, according to a recent study published by the Boston Consulting Group (BCG).
“This impressive performance is even more apparent when compared to the same banks’ retail banking divisions, where revenues and net profits have barely touched 2008 levels, BCG stated.
In its Corporate Banking Benchmarking Report, BCG highlights a “multi-speed world” for the corporate banking divisions of banks across the globe and highlights positive growth for GCC markets in this context.
When the performance of a set of leading GCC banks who participated in BCG’s corporate banking benchmarking is examined, the GCC markets’ comeback is further evident compared to those in other geographies. At 12 percent, this set of GCC corporate banks have witnessed some of the highest growth rates between 2009 and 2011 among all geographies surveyed.
Globally, while banks in Europe are still reeling under pressure in the aftermath of the financial crisis with limited growth or declines in revenues, corporate banking divisions of banks in the GCC, the United States, Asia, Rapidly Developing Economies (RDEs) and Advanced Resource Economies (Canada and Australia) are showing improved performance with high single-digit and even double-digit growth.
Interestingly, GCC corporate banks appear to be lagging behind when compared on the basis of other key aspects like return on regulatory capital. Close to two-thirds of GCC corporate banking divisions are not returning the generally expected 16 percent cost of equity hurdle.
“While banks have been able to increase their revenues and even profits by extending more credit and keeping loan losses in check, they have been limited in their options of diversifying their source of revenues away from standard credit offerings. This has led to no real improvement in the return on regulatory capital in spite of increasing revenues,” said Markus Massi, partner and managing director, BCG’s regional leader in wholesale banking and capital markets and author of the study.
The findings become even clearer when taking a disaggregated view of banks’ performance. Corporate banking segments (whether micro/small, mid or large) within the corporate banks in the region, which have smaller percentages of revenues from credit and have performed well on most of the levers of BCG’s blue-chip corporate bank framework, have shown higher return on regulatory capital. In contrast, business segments with high or very high percentages of their revenues coming from lending products and are also performing badly on many or all of these levers are far below the ideal hurdle rate of 16 percent return on equity (ROE).
The report highlights that corporate banks will need to adopt a segment-specific approach to setting target returns in order to create incentives aligned with equity investors’ interests, as all segments cannot be measured against one single target ROE hurdle rate.
“GCC banks tend to have wider variation in performance as compared to their counterparts in developed markets across almost all key matrices. This clearly shows the developing nature of the market and the development stage of individual banks, as we see top performing banks able to pull performance levers in a more superior manner,” added Mohammed Turra, principal in BCG’s Dubai office and co-author of this report.