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The Gulf's banking service distribution network has only 10 branches and 50 ATMs available per 100,000 residents. Ravindranath K / The National
The Gulf's banking service distribution network has only 10 branches and 50 ATMs available per 100,000 residents. Ravindranath K / The National

GCC banks gear up for renewed growth

The Gulf has been resilient while other economies have struggled. But to build on their strengths, regional banks must take a strategic approach.

Before the global economic crisis, GCC states were reaping the fruits of a regional diversification movement in which non-oil growth industries such as property and construction enjoyed a meteoric rise.

Fuelled further by rocketing oil prices, the GCC emerged as the Middle East and North Africa (Mena) region's fastest-growing economic bloc.

The Gulf's banking sector played a huge part in facilitating the surge and handling the region's teeming wealth. Although the early phases of the downturn slowed economic activity, overall the crisis has had a minimal effect on the region's finances.

Banks still continue to benefit from the Gulf's economic resilience, although the industry finds itself in a curious situation: despite its key role in handling the region's wealth, the banking sector is relatively underpenetrated.

Even the regional service distribution network is underdeveloped, with only 10 bank branches and 50 ATMs available per 100,000 residents; in contrast, the US alone has 35 branches and 175 ATMs.

Given the Gulf's rapidly growing and youthful population, expanding middle class and diverse economy, the growth potential for the broader distribution of banking products is enormous.

Gulf banks must address various risks and challenges to tap into the huge opportunities on offer.

Throughout the process of global economic recovery, they will have to contend with slow economic growth, restrained margins because of low interest rates, and non-performing loans, which climbed from 2.5 per cent in 2008 to 4.3 per cent throughout the region in 2009.

Low investor confidence in local capital markets will also complicate product and service sales. The key is to find a balance between effectively handling these issues and strategically investing for future growth.

Early adapters have taken various approaches, such as focusing more on liquidity management rather than the bottom line.

They are also taking a more cautious attitude towards lending and monitoring risk indicators such as the loan-to-deposit ratio, which slid across the region to 92 per cent in 2009 from 99 per cent in 2008.

The old practice of basing lending decisions on the established reputation of clients is also being set aside.

Four trends are expected to dictate the Gulf's banking landscape as the sector pursues growth opportunities.

Optimised efficiency: assuming ample regulatory backing, several bank consolidations are expected in a bid to improve efficiencies of scale.

Regionally, the industry is generally scattered, with banks dwelling more on already saturated local markets and consolidations limited. Alliances will enable players to share internal strengths, optimise costs and improve processes and technologies on the way to achieving long-term sustainability.

Market segmentation and targeted value: Gulf banks traditionally divide customers into individual and institutional or corporate accounts. Increased competition will influence more segmentation and a shift in focus. Retail customers could be further segregated into "affluent" and "ultra-high net-worth".

Banks could also enhance international products and services for expatriates, who represent more than 40 per cent of the Gulf population. Small and medium-sized enterprises are another critical yet underserved category.

The next step is to develop tailored products and services.

Access to debt funds, exchange traded funds and property investment trusts would be highly attractive to the region's investors.

Network growth: Gulf banks are already engaged in expansion activitiesbeyond their home markets. Bank branches in the UAE, Saudi Arabia and Oman have grown by 9 per cent a year over the past two years, despite the recession. The last priority is to adopt the best delivery channel.

Online banking and "light retail" branches are expected to gain more popularity as local players leverage advanced back-office technology and the Gulf's expanding internet infrastructure.

Focus on fee-generating businesses: more bank executives are turning away from riskier non-investment and interest income to more stable fee-generating businesses.

New business lines, including those covering asset management and corporate and investment banking, are expected to be established.

This trend will require recruiting teams with substantial knowledge of local markets and advanced management and technical skills.

A surging population combined with an underdeveloped banking sector is putting a strain even on Mena countries lacking the resources that have fuelled the GCC's affluence.

Gulf banks will need to look towards the Levant region, Iraq and North Africa to retain their leadership.

They will also need to be highly motivated and armed with the right service capabilities.

Julien Faye and Jad Zerouali are Bain & Company partner and manager in the firm's financial services practice. Both are based in Dubai

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