According to a new study by The Boston Consulting Group (BCG), the banking industry in the Middle East settled at single digit revenue growth in 2012 with a 6.9 percent increase. The increase in profits was slightly higher at 8.1 percent, stemming largely from extraordinary income sources.
Based on 2012 annual results as reported by the banks in the first quarter of 2013, the new study is part of the consulting group’s annual banking performance indices measuring the development of banking revenues (operating income) and profits for leading Middle East banks.
BCG launched the first edition of the banking performance index in the Middle East in April 2009, creating a customized index specifically for the regional banking markets, with 2005 revenues and profits as starting benchmarks. The index covers the largest banks in Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE.
The 2012 BCG index includes 32 banks from across the GCC capturing nearly 80% of the total regional banking sector.
Banking performance varies by country
While banks in Qatar grew revenues by 12 per cent 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 by 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%. Bahrain banks also saw higher LLPs but with a less steep growth rate.
Retail revenues and profits near previous highest levels
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.
Corporate banking revenues grow at slower pace while profits decline slightly
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.
Need for investments in growth and competitiveness
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.