Gulf customers’ loyalties will be tested due to increased choices and product offerings by domestic and cross-border competitors. Arab banks suffer from many weaknesses that mirror Arab economies: they are small, fragmented and inadequately diversified. Size matters, and smaller banks will struggle to survive because of the cost of IT, the cost of professionals and a weak ability to diversify risk. The answer is consolidation, to create larger institutions with better resources to bridge the skills gap in a cost-effective manner, improve value proposition, leverage their local knowledge, and continue enhancing channels and distribution capabilities.
Consolidation poses its own challenges. While international banks have been active in the lucrative business areas, such as wealth management and project finance, they are likely to target prime corporate customers and consumers with offerings such as credit cards. Gulf banks need to maintain their advantage of knowing the customer by investing in technology. Unfortunately, they do not have the necessary size and muscle for this.
From a business risk perspective, while the outlook is very positive in the medium term, Gulf banks are still exposed to the local business cycle: capital markets, real estate development and an expected slowdown in consumer loans could pose risk, which provides another good reason for diversification out of the region to improve banks’ medium-term risk profiles. As GCC capital markets develop, so will a bank’s ability to expand. More companies are being privatised and listed, and capital market regulation is being enhanced and strengthened.
Profit margins for participating in project finance deals have fallen sharply over the past year due partly to the jump in international bank liquidity. As local and regional banks have a higher cost of funding, their tolerance to skimpy margins is lower than that of large international banks. This will continue to be a challenge for local and regional players.
Another key challenge – which will be more acute in some Gulf countries than others – is the ability to attract and retain talented national and international staff.
