A Vibrant Market

The most direct path to success is to target profit pools in specific businesses of the universal banking model where retail banks can define and deliver value propositions that can win in the new digital age

The economies of energy exporters in the Middle East are powering ahead as the oil boom and a rebound in domestic activity helped insulate them from a dual threat of slowing growth and soaring inflation—which is threatening to tip the global economy into recession.

A rally in Brent prices, which traded mostly above the $100 mark last year, had the effect of pushing budgets of oil- rich Gulf Arab states into the black for the first time in years and the spillover effect is being felt across the banking sector. It is worth noting that growth in the Middle East banking assets is linked to regional GDP, which moves largely in tandem with oil prices.

GCC banks are returning to form after a strong finish to 2022. “Banks in the GCC region are set to report near-prepandemic levels of profits for the full year

2022, driven by an economic recovery and central banks’ move to tighten monetary policy,” S&P Global said last December adding that the benefits are expected to continue this year.

Regional banks are treading a fine line characterised by evolving customer demands and expectations, a challenging external environment, intensifying competition and technological disruption. However, these trends are not new to the GCC banking sector, but they have been significantly intensified by the new economic order.

PwC said that regional banks have been investing significant sums in their digitalisation capabilities as well as joining forces with financial technology firms to enhance customer engagement and remain agile.

Meanwhile, the GCC banking sector remains highly fragmented making competition intense and banks in the region are demonstrating that they are eager to buy, sell, invest or partner to enhance their competitive edge, rightsize their portfolios, add scale and expand markets.

Customer engagement

Globally, retail banks have committed significant capital to digital and analytics transformations to enhance the customer experience across mobile and web channels. Specifically, retail banking customers are clamoring for a superior cross-channel experience and hands-on guidance during challenging times.

“These heightened demands will require banks to go beyond a product lens and create customer experiences that are data-driven, consistent across channels, and complete with personalized advice,” said Deloitte.

Banking customers now not only expect a superior experience from retail banks, but one that is tailored to their unique needs and financial institutions can demonstrate their unique value proposition by aligning distribution models and delivering datadriven offerings.

Leading retail banks in the GCC region are implementing an entirely new approach to innovation by rearticulating their value proposition, bearing in mind the power of simultaneously simplifying and upgrading the customer experience and creating value through data.

This strategy requires banks to free themselves from a ‘product-centric’ view but instead adopt a ‘customer-first’ strategy which starts with understanding customer needs. To thrive in the new digital environment, banks need to understand that the fight for customer relationships has shifted to new unfamiliar terrain.

McKinsey said that many incumbents are ill-equipped to defend market share on the digital battlefield—a battle that they cannot afford to lose. To maintain and fortify their market positions, banks in the GCC region are launching new, reimagined, fit-for-purpose value propositions and business models.

Retail banks in the GCC region are leveraging their existing resources to introduce speedboats—cloud-native digital spinoffs that enable faster timeto-market for the launching of new products and market expansion. Digital attackers or challenger banks such as UAE’s YAP and Saudi Arabia’s D360 Bank are fighting for market share with digital banking units of incumbent banks including Emirates NBD’s Liv., Bahrain’s Arab Banking Corporation’s (Bank ABC) ila Bank and Boubyan Bank’s Nomo.

Meanwhile, to deliver a market-leading platform-based value proposition, retail banks will need to work like technology companies. Customers’ lifestyle habits are increasingly motivated and directed by the speed and simplicity of digital services that are at their disposal; the same is true of how they want to bank.

Today’s retail banking market is significantly different in shape and structure from the old environment and winning banks will be those that choose the businesses in which they can lead and commit to building a value proposition, core technology and operating model fit to win on the digital battlefield.

Return to profitability

GCC banks started 2023 on a solid footing after earnings for most financial institutions almost reached pre-pandemic levels last year spurred by high oil prices, soaring interest rates and large-scalegovernment projects that are supporting their creditworthiness.

S&P Global said that the banks’ profitability mirrors the US Federal Reserve’s hawkish stance, the currency pegs between GCC currencies and the US dollar and the structure of regional banks’ funding profiles.

The combined profits of the top five banks in the Gulf region— Qatar National Bank (QNB), First Abu Dhabi Bank (FAB), Emirates NBD, Saudi National Bank (SNB) and Al Rajhi Bank—reached over $16 billion in the first nine months of 2022. QNB, the GCC’s biggest lender by assets, reported a 9% increase in annual net profit to $3.91 billion (QAR 14.3 billion) in 2022 from $3.6 billion (QAR 13.2 billion) a year earlier.

S&P Global

Gulf central banks raised key interest rates by half a percentage point in December following the Federal Reserve’s decision to increase rates by the same. Monetary policy in the Gulf region is usually guided by Federal Reserve—which signaled that more hikes are coming as data indicates the fight to wrestle inflation back to manageable levels is far from over.

S&P Global said that net interest income—the difference between interest revenues earned from lending activities and interest paid to depositors—at the region’s banks has soared over the quarters as lenders are passing rate increases on to customers.

M&A activity

With the backing from some of the world’s biggest sovereign wealth funds, banks in the Gulf Arab states cannot hide their growing ambitions to dominate the global financial services industry. FAB, one of the Middle East’s largest banks by assets, said in January that it had considered a bid for London-listed Standard Chartered (StanChart) but was no longer doing so.

FAB was created via a landmark merger between the National Bank of Abu Dhabi and First Gulf Bank in 2016—a tie-up that sparked a deluge of consolidations in the Middle East’s financial services industry.

The Abu Dhabi-based bank’s interest in acquiring StanChart comes months after it withdrew an offer to acquire a controlling stake of ‘no less than 51%’ in the Egyptian universal bank EFG Hermes Holding. The lender has not made any other significant acquisitions since the takeover of the Egyptian unit of Lebanon’s Bank Audi in 2021.

Buoyed by bumper hydrocarbon receipts, investors based in the oil-rich GCC region increased their shareholdings in European financial institutions in 2022 and could buy further financial services stakes this year. SNB invested as much as $1.5 billion in Credit Suisse last October for a stake of up to 9.9%—making the Saudi bank the top shareholder.

SNB, which was founded in 2021 through the merger between Samba

Financial Group and the National Commercial Bank, now commands about 30% of the overall banking market in the Gulf state. Credit Suisse already counts Saudi Arabian conglomerate Olayan Group and Qatar Investment Authority among its top shareholders.

Meanwhile, the GCC banking system remains highly fragmented making competition intense and the trend is likely to intensify due to pressure on small banks’ profitability, alternative

“Retail banks attain scale by capturing market share, merging with or acquiring other banks and pursuing fastgrowing markets. Increasing revenues is fundamental to this process and strategically vital because it enables banks to compete effectively over the long term,” said McKinsey.

Earlier in January, Bank ABC said that it has completed the merger of its Egyptian business with BLOM Bank Egypt. The deal tripled Bahraini lender’s delivery channels and competition from digital banks. This will likely increase shareholders’ appetite for consolidation to enhance the resilience of banks’ financial profiles. market share in Egypt to create a bank with total assets of $2.5 billion (EGP 67 billion). Kuwait Finance House also completed its acquisition of Bahrain’s Ahli United Bank last October—a rare cross-border tie-up that had been almost four years in the making.

HSBC Bank Oman and local rival Sohar International Bank entered into a binding merger agreement in November. Sohar International is also linked with a potential merger with Omani Islamic lender Bank Nizwa. Both proposed mergers are subject to regulatory and shareholder approval.

The mergers and acquisitions market has rebounded over the past two years to post impressive increases in deal volume and value in 2022—a trend that is expected to continue as banks position themselves for improved economic conditions.

The structural characteristics of banks in the region are a diverse mix of conventional and Islamic entities as well as being both retail-focused and corporate-aligned in their stance— which from a potential future merger perspective will offer value-added consolidations. Further GCC investments in major European banks and other assets are possible as the wealthy oil-rich countries have been buoyed by a global increase in energy prices.