A recent study by The Boston Consulting Group (BCG) shows that the Middle East banking revenues continued to grow at single digit rates in 2012 with a 6.9 percent increase, while profits increased by 8.1 percent due to an overproportional increase in extraordinary income. At an aggregate level, provisions for bad loans picked up by 2 percent, after having fallen last year. Increases in operating costs exceeded revenue growth slightly with 7.2 percent. Loan loss provisions (LLPs) picked up significantly in Saudi Arabia and Kuwait while the UAE banks registered a further decline of 13 percent in 2012, though still remaining high.
The single digit revenue growth is challenging given that most banks still need to invest in the business and have to build process and IT platforms making it difficult to keep cost growth below revenue growth. Rising LLPs represent an additional constraint. Despite this, the performance of Middle East banks clearly exceeded that of their international counterparts, some of which experienced further revenue declines in 2012.
In light of this, Middle East banks should use the opportunity to invest in capability development and expansion of their businesses, especially given that their cost income ratios are still far better than those of the international banks.
“The 2012 BCG index includes 32 banks from across the GCC capturing nearly 80 percent of the total regional banking sector,” said Reinhold Leichtfuss, senior partner and managing director in BCG's Dubai office and leader of BCG’s financial institutions practice in the Middle East.
He added: “While the performance of Middle East banks settled at high single digit growth figures in 2012, it still compared very well with the international bank, which experienced a further revenue decline. This provides the Middle East banks the opportunity to undertake the necessary investments in capabilities and regional expansion."
While banks in Qatar grew revenues by 12 percent and banks in Saudi Arabia and Oman achieved high single digit growth rates, banks in the UAE, Kuwait and Bahrain achieved a revenue growth rate of 5 percent or below. Banks in all countries achieved above 7 percent profit growth rates, except in Kuwait with 3 percent.
In 2012, loan loss provisions varied significantly per country. In particular, banks in Saudi Arabia and Kuwait had to build higher provisions due to increasing delinquencies in sectors such as real estate, construction, banks, financial services, and manufacturing. UAE banks were, on aggregate, able to significantly reduce the existing high provisioning levels by 13 percent. Bahrain banks also saw higher LLPs but with a less steep growth rate.
In 2012, retail banking revenues in the GCC, which had remained rather flat during the last few years, experienced a further uptick of some 4 percent, largely due to an increase in the three biggest markets — the UAE, Saudi Arabia and Kuwait. Oman repeated the strong double digit growth of the previous year. On the whole, the variance between growth rates of individual banks in retail was very high and ranged from -39 percent to +19 percent.
GCC retail profits, which had been declining for several years, saw another significant uptick of 8 percent compared to 11 percent last year. Nevertheless, the profit level in 2012 remained slightly below 2005 and 2006 levels which were exceptional retail years in the GCC.
The corporate segment reached the top index level in revenues in 2012 but only with a minor growth of 3 percent. In terms of country breakdown, the UAE and Kuwait banks experienced a decline in corporate banking revenues while the other countries experienced a healthy increase of 6 percent or more. Profits declined slightly driven again by the countries with the highest increase in loan loss provisions, that is, Saudi Arabia and Kuwait.
In an environment of slower market growth smart strategies and better capabilities are essential to grow more than the competition. Leading Middle East banks are striving for regional expansion to find new areas for growth. Many Middle East banks are prioritizing better customer service as a critical part of their agenda; quite a number actually want to become the best bank in customer experience in their countries. Other banks are in the process of identifying new growth areas in order to avoid a decline in revenues and there are a number of banks which are focusing on their IT and operations platforms in order to prevent costs from outgrowing revenues continuously.
Leichtfuss said: "Middle East banks should approach these challenges in a professional way and have the foresight to invest in strategic areas. Only appropriate platforms in IT and operations, such as online banking and automation of processes will allow scalability of activities. This is an opportune time for Middle East banks to excel, their cost income ratios are still far below their international counterparts, be it in Europe, the United States, Australia or Asia."
Source: Arab News