Leading Middle Eastern banks have been performing consistently and strongly over the last four years - including 2008 - though the global despite banking industry has been reeling from one crisis to the next due to financial crisis and economic slowdown, the Boston Consulting Group (BCG) said in a new study. However, leading international banks offer additional insights for growth, it said. The study is part of BCG's annual banking and retail banking indices measured by the development of banking revenues (operating income) and profits for leading global banks. BCG has now customized this index specifically for the Middle Eastern banking markets, with 2005 revenues and profits as starting benchmarks. The index covers the largest banks in Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE, which constitute around 70 percent of banking assets in these countries. Overall, banking revenues for the largest banks in the Middle East have grown by an annual average of 17 percent over the last four years. Profits in 2008, however, have dropped back to 2005 levels due to higher risk provisions. Does this mean that the Middle East is just one year behind the global cycle? According to Dr. Reinhold Leichtfuss, senior partner in BCG's Dubai office and leader of BCG's financial services business in the Middle East, “Yes and no is the quick answer-there are some remarkable differences. While the vast majority of Middle Eastern banks refrained from investing heavily in secured credit facilities from the US, they are facing region-specific risks such as property market risks. However, several of them are more stable due to a traditionally higher share of retail and domestic banking in their overall business portfolio. While traditionally 50-55 percent of global banking revenues stem from retail banking, some of the biggest Middle Eastern banks derive 60-70 percent of their revenues from this business.” According to the BCG index, the revenue situation in individual countries in the Middle East varies: • Saudi banks represent the highest share in Middle Eastern banking and weighting in the indices. They recorded the lowest revenue growth at 9 percent, partially because they experienced their strongest growth already in 2006 at group level as well as in retail banking during the course of the boom in IPOs and brokerage. • UAE and Qatar banks achieved the highest revenue growth over the four years, both at group level and in retail banking, with Kuwait banks following closely behind. In contrast, profits show a somewhat more troubling picture, as they dropped from their 2007 highs down to 2005 levels in 2008. UAE and Qatar banks were impacted less and lead in profit growth, both in group and in retail/domestic banking. The decline of profits is largely driven by a few individual banks and high loan loss provisions - of which more must be expected. “Despite the decline in profits in the Middle Eastern banking system, it is clear that most western banking systems have been hit much more severely by the international financial crisis to date. Less discussed, however, is the fact that there is a group of international banks that have performed better than their peers. These banks have several things in common, including a greater reliance on retail banking. Many of these banks were built with targeted programs of organic and inorganic growth and expansion strategies. Furthermore, they followed a resilient universal banking model that allowed them to survive the crisis better than others.” According to the BCG report, although Middle Eastern banks are less affected by the downturn than many of their counterparts, they stand to learn valuable lessons from leading international banks. BCG proposes five focus areas: • Control risk effectively: Risk in all forms will remain a dominant topic, be it credit, market, operational, or the long-neglected liquidity risk. Even the leading banks have to significantly improve their liquidity risk management systems with more qualified stress testing, contingency plans, and appropriate organization of governance and responsibilities. • Become an efficiency champion: Traditionally, Middle Eastern banks have enjoyed very favorable cost-income ratios. However, when revenue growth stalls, cost growth needs to be contained. To some extent, this can be accomplished with “easy” cost cutting through headcount reduction; however, it increasingly requires genuine process improvement which can only be achieved through disciplined design approaches and relentless implementation across organizational units. • Maximize sales power: Revenue growth will become much more difficult due to tighter credit lines and reduced tendency of customers to lend and invest. In markets with lower revenue growth, the ability to fight for market share becomes more decisive. Hence, superior sales and service culture and management systems will be prerequisites for the winners. • Try to become a winner of the crisis: The crisis offers opportunities to those who have been prudent in their credit policies and proactive in developing superior business and operating models. Business models need to be customized to individual institutions, and operation models should be adopted after rigorous assessment of value proposition. __
