Wednesday, Apr 27, 2011

Gulf News

Dubai The banking sector in the Gulf is expected to witness slow growth in revenue and lending, Dr Reinhold Leichtfuss, Senior Partner and Managing Director at BCG Middle East and head of BCG’s Financial Institutions business in the Middle East, told Gulf News in an interview.

A recent study by Boston Consulting Group (BCG) shows that Middle East banking revenue growth slowed in 2010, whilst profits picked up significantly due to reduced provisions for bad loans. Overall, Middle East banks were much less affected by the financial crisis than their international peers — the profit index did not fall below 100 during the crisis and is slowly returning to 2006 levels.

“We expect growth rates to remain single digit for most of the countries in the region. They will probably rise again; however, this is likely to be in the range of 4 to 8 per cent rather than only 2 per cent,” said Leichtfuss.

“This does not mean that individual banks might not grow at a higher rate; but to do so, they will have to steal market share from competitors which requires superior value proposition as well as sales power and service quality.”

BCG’s regional banking index for 2010 shows that banking revenues stagnated with only a minor increase at the end of 2010 compared to 2009.

On the other hand profits in 2010 increased significantly due to lower loan loss provisions (LLPs) which were down 17 per cent yet still remained high at above $8 billion.

Banking revenues in the Middle East stagnated while international benchmarks recovered — 21 out of the 35 banks covered by the index grew their revenues from 2009 to 2010.

As anticipated by BCG last year, profits recovered in 2010 despite a decline in the first half of 2010 compared to 2009. Banks in the Middle East still had high provisions, but most banks in the region stayed well below the previous year’s level.

All countries remained in total below the 2009 level of provisions.

The BCG index shows while revenues and profits remained relatively stable for banks in Saudi Arabia, all other countries showed double digit increases in profits mainly due to strong reductions in loan loss provisions.

A sustained decline in provisions is expected to improve operating margins of GCC banks. “We do expect a further decline in provisions for most banks and, in principle, across all GCC countries. The LLP levels of 2009 and 2010 have been extraordinarily high and we anticipate that banks will return to more normal levels,” Leichtfuss said.

Dubai Boston Consulting Group’s banking index shows that the core banking segments (retail and corporate) are developing at a relatively stable rate in terms of revenues and profits.

While the compound annual growth rate (CAGR) of retail revenues was over 25 per cent in the Middle East from 2001 to 2006, it declined to an average annual growth rate of 2 per cent between 2006 and 2010. In fact, since 2008, the time of very strong growth is over in the region and even though the industry is recovering from the worst of the crisis, returning to pre-crisis development in the foreseeable future is unlikely.

“This new market environment will lead to a significant increase in competition for the most attractive customer segments. In a slow growth environment banks are forced to build on their competitive strength, since growth will require banks to increase market share at the expense of others,” said Dr Reinhold Leichtfuss, Senior Partner and Managing Director at BCG Middle East .

Amidst the intensifying competition, the big challenge for many banks would be to keep on sharpening competitiveness while containing cost growth. Despite the increasing drive towards efficiency, BCG does not expect an increase in consolidation drive that could result in more mergers and acquisitions among regional banks.

“We expect the consolidation process to be slow. Fortunately, banks can implement more efficient operating models on their own as well. More streamlined and automated processes and targeted productivity management can increase efficiency substantially,” Leichtfuss said .

By Babu Das Augustine?Deputy Business Editor

Gulf News 2011. All rights reserved.