GCC banks may do well to invest and improve: BCG
Settling into high single digit growth rate and healthy profitability, Gulf banks would do well to undertake necessary investments that need to be taken in the medium and long term. And that includes improving the processes, the information technology platform and online banking, all in an effort to improve customer service in order to emerge as one of the best banks locally or even regionally.
That was the message from Reinhold Leichtfuss, senior partner and managing director in Boston Consulting Group’s Dubai’s office during the presentation of the BCG Middle East Banking Performing Index 2012 in Dubai yesterday.
“It also includes expansion abroad, of course in a cautious and in a very wise way,” Leichtfuss said, especially so, when cost income ratios of GCC banks are much lower than those of the international banks. While cost-income ratio is 63 per cent for Europe, 61 per cent for USA and 52 per cent for Asia and Australia, it is only 34 per cent for the GCC banks.
According to the report, GCC banks saw another year of “good” growth in 2012, with 6.9 per cent rise in operating income and 8 per cent in profit. Though a small part of the operating income, ‘extraordinary income’ contributed 12 per cent to it. This category of income usually comes from sale of one or two subunits of or portfolio sale of the bank.
However, there were variations between countries. While revenues in Qatar grew by 12 per cent, followed by Saudi Arabia and Oman achieving high single digit growth rates, banks in the UAE, Kuwait and Bahrain achieved 5 per cent or below. When it came to profit growth rates, except Kuwait at 3 per cent, all countries achieved above 7 per cent.
“What is also interesting is that [by last year’s numbers], sooner or later Qatar is going to take over Kuwait as the third biggest market [ in the GCC],” said Leichtfuss .
Banks’ expenses showed that they were growing more or less in the same pace as revenues and that’s always a challenge for the bank to keep that in line.
“If expenses are outgrowing the revenues, then the cost income ratio increases and that is something that many banks want to avoid,” said Leichtfuss. “But on the other hand I would also say that Middle East banks must also have the courage to invest.”
At an aggregate level, the loan loss provisions (LLPs) went up slightly at 2 per cent last year, when the expectation was they would go down in all the six Gulf countries. Individually, Saudi Arabian and Kuwaiti banks had to provision more for the loans due to delinquencies in construction and financial services sector. In case of the UAE, banks’ LLPs went down by 13 per cent.
“The UAE banks saw a reduction, however [this was] from still quite a high level,” noted Leichtfuss. “The loan loss provisions are still the highest in the UAE, twice as high in the UAE as they are in KSA. But the trend is positive — they are going down.”
retail and corporate segments of the banks, the former’s revenue grew by 4 per cent and a stronger growth in profits. Growth in the corporate banking was a bit more modest with 3 per cent on the revenue side as well as on the profit side.
“Overall, quite a good and healthy development of the entire banking sector in all the GCC countries,” Leichtfuss said. “That does not necessarily mean the same for every bank because sometimes some banks are winning and growing very fast and other banks are even reducing their revenues or profits. So, there is quite variation behind the average numbers.”