A recent study by The Boston Consulting Group found that, in 2015, GCC banking revenues grew by 7.2 percent, down three percentage points from 2014. The impact of the massive decline in oil prices has reached the banking industry – affecting some banks more than others. Despite this, profits rose by 6.3 percent compared to a 14.7 percent in 2014.
"In addition, 2015 saw two patterns that have rarely been witnessed in the last six years: operating costs grew by only six percent, i.e. below revenue growth rates. It was typically the other way around in previous years. The second interesting pattern showed that, at an aggregate level, provisions for bad loans increased slightly – by 0.6 percent,” said Dr. Reinhold Leichtfuss, a Senior Partner & Managing Director at BCG's Middle East office.
The main customer segments – retail and corporate banking – grew as well, with 8.1 and 3.3 percent growth rates, respectively. Extraordinary income declined by 21.5 percent.
Again, the performance of GCC banks clearly exceeded that of their international counterparts, a number of which experienced further revenue declines in 2015.
DUBAI — According to a new study by The Boston Consulting Group (BCG), the banking industry in the GCC grew at a lower rate in 2015 than it did in 2014 with just a 7.2 percent increase, stemming almost exclusively from major customer segments such as retail and corporate banking.
Based on the banks’ 2015 annual results released in the first quarter of 2016, the newest study is part of BCG’s annual banking performance indices measuring the development of banking revenues (operating income) and profits for leading GCC banks.
BCG launched the first edition of the banking performance index in the GCC 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 in the UAE.
“The 2015 BCG index includes 45 banks from across the GCC, capturing about 80 percent of the total regional banking sector,” added Dr. Leichtfuss.
Growth of GCC banks in 2015
Banking Performance Indices: GCC vs. International Banks
Oman and UAE banks show strongest growth
In 2015, Oman banks led the pack in terms of growth numbers with 9.6 percent in revenues and 10.5 percent in profits. In parallel, UAE banks’ revenues grew by 8.1 percent and Kuwait banks recorded a 11.4 percent profit growth. The spread of revenue and profit growth rates between the GCC countries was significantly smaller than that of last year, ranging from four to 11 percent. There was no negative growth on a country level.
Instead, in 2015, the development of loan-loss provisions (LLPs) varied significantly between the countries, resulting in total, in a small increase of 0.6 percent. The two biggest countries, the UAE and Saudi Arabia, ended up with a small increase of two percent and 4.8 percent, respectively. Whereas Bahrain banks grew LLPs by 39 percent and Oman banks by 21 percent.
This is compensated across the GCC by a strong decline in Qatar and Kuwait. In 2014, we had observed a decline in LLP across almost all countries. Going forward, a slight increase can be expected due to current trends in economic development. A first sign of this is that the majority of banks in the UAE provisioned more in 2015 than they did the year before.
Banking Performance Indices: Revenues, Profits and Loan-Loss Provisions per country (2015 vs. 2014)
After a number of years with growth in operating expenses exceeding that of revenues, 2015 came out with a moderate aggregate cost growth of 6 percent, with Qatar and Kuwait banks managing almost zero and Bahrain recording a negative growth in cost of one percent. A number of banks preempted the consequences of a low oil price environment and restricted costs and investments. Some larger banks as well as those that had significantly increased costs in the past, managed to achieve low and, in several cases, even negative growth.
Retail revenues grew by a strong 8.1 percent while retail profits slightly declined by 1.8 percent
In 2015, retail banking revenues in the GCC experienced a further uptick of 8.1 percent, largely due to an increase in Qatar (16 percent), Oman (11 percent) and the UAE (10 percent).
GCC retail profits faced a decline in aggregate, largely because of a negative growth in the UAE. The growth rate in all the other countries was moderate; in fact, only banks in Qatar reached a double-digit growth rate with 13 percent.
Corporate banking revenues grew moderately by 3.3 percent while profits increased by 8 percent
In 2015, only Oman experienced double-digit growth rates in both corporate revenues and profits. In the UAE, however, there was a slight decline in revenues while profits grew by 22 percent due to a decline in provisions. All the other countries realized moderate revenue growth. Profit growth numbers, on the other hand, range from minus one percent in Saudi Arabia to 18 percent in Kuwait.
Superiority of strategies, business models and execution decisive for widening gaps between GCC banks
“In 2015, the majority of GCC banks were able to achieve revenue growth. The increasing divergence when it comes to profit development is remarkable: while 11 to 17 banks still achieved double-digit growth, 11 to 15 banks witnessed negative growth overall or in customer segments. The number of banks in 'group' and for the 'retail' and 'corporate' segments deviate, since not all banks have a complete segment reporting yet,” stated Dr. Leichtfuss. "The midfield of banks with single-digit growth has become quite small. It is interesting to note that, in several markets, not the top banks but some of their followers achieved the highest growth rates.”
“According to BCG’s analysis, it is obvious that banks with superior strategies and strong business models can truly execute decisively and grow the strongest,” explained Dr. Leichtfuss.
Over the past decade, the leading banks have grown at double or triple the rate of the average ones. In almost all cases, such a development is based on a superior and consistently-executed strategy.
“In the coming three to five years, we consider the digitization of processes as the most important task that banks need to achieve – since this will enable advanced banks to reach the next level of customer experience as well as cost efficiency.”
Needless to say, a superior performance culture and rigorous execution will continue to be equally decisive. It will be required, due to the fact that in 2016, oil price and environment is likely to remain challenging.
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we help clients with total transformation—inspiring complex change, enabling organizations to grow, building competitive advantage, and driving bottom-line impact.
To succeed, organizations must blend digital and human capabilities. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives to spark change. BCG delivers solutions through leading-edge management consulting along with technology and design, corporate and digital ventures—and business purpose. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, generating results that allow our clients to thrive.