Gulf banks are currently in a strong state and have outperformed their global counterparts over the past several years. However, maintaining a good position requires a constant focus on strategy and processes.
A new report, released by McKinsey & Company, identifies seven priorities for the way forward, after the Gulf financial sector successfully outperformed the global average in several financial metrics, including return on equity (three or four percentage points), margins, and cost-to-asset ratios.
Going forward, the Gulf banking sector seems to be in a good position to deal with macroeconomic uncertainty and future challenges, but falling into self-satisfaction would be dangerous.
In its report, McKinsey outlined seven priorities that bank executives should focus on in the coming period:
1. Managing interest rate uncertainty
High interest rates have boosted revenues and margins for Gulf state banks, but they also require strong internal risk management guarantees. Regional banks should strengthen asset and liability management, and conduct stress tests, to ensure flexibility in a volatile interest rate environment, focusing on the conduct of depositors and maintaining the health of the balance sheet.
2. Increasing operating efficiency
Banks in the Gulf states have a relatively high level of operational development, but there are still plenty of back-end processes, which they have to streamline. One way to do this is through automation, which will open employees’ time and energy to more important tasks.
“The digitization of these processes and the automation of routine tasks would allow banks to use their human resources more efficiently, and artificial intelligence and machine learning applications can automate a growing range of complex processes in back offices, sharply reducing operational costs,” the report said.
3. Transforming the customer experience
The Gulf region has a relatively young population, which means that regional banks will have to pursue digital transformation, to keep abreast with the growing demand from consumers for flexibility, ease of use and better customer service, as any successful digital transformation strategy will need to integrate artificial intelligence, especially in the field of customer service.
Many banks in the UAE and Saudi Arabia have already moved towards a complete digital transformation of their customers’ journeys. In addition, new actors (including digital banks and fintech companies) are changing the landscape of retail banking, by offering innovative and customized products to consumers at a lower cost.
4. Focus on investment
Environmental and social investment and governance should be seen as an opportunity, not just a requirement or commitment. There are positive signs that the financial sector in the Gulf states is increasingly involved in this area.
For example, two of the top five banks in the UAE have joined the UN Zero Banks Alliance, and most major banks in Kuwait, Saudi Arabia and the UAE have established sustainable financing frameworks over the past five years.
5. Enhancing mergers, acquisitions and restructurings
Historically, mergers and acquisitions have yielded higher returns during economic recessions, making gains for companies in boosting growth, generating revenue, and expanding the market. Recent examples include major mergers, such as the formation of Al Ahli Bank of Saudi Arabia or the acquisition of Ahli United Bank by Kuwait Finance House.
Several banks in the Gulf states have also explored acquisitions and exits in the field of financial technology, to enhance efficiency and refocus on core processes.
6. Maintaining competitiveness in the digital world
Gulf banks can diversify their revenue, by moving to areas, such as open banking and embedded finance, that require a shift towards technology-based operating models.
Key strategies include the adoption of multifunctional teams, rapid project planning, and advanced engineering practices, all of which can help significantly improve customer experience and operational efficiency.
7. Updating core technologies beyond digitization
To maintain competitiveness in the global financial landscape, Gulf state banks need to update their systems to be more customer-focused, data-driven, and able to facilitate rapid integration and deployment of custom products.
These systems will need to introduce strict cybersecurity measures, such as zero-confidence architecture, DDoS protection, token, bilateral authentication, and biometric identification, which have become critical to effectively mitigating digital risks.
“Thanks to strong local economies, favorable demographics, supportive government agendas and regulatory frameworks, banks in the Gulf countries are well-positioned to continue to expand and diversify,” McKinsey said.
It added, “While the global macroeconomic landscape remains uncertain, we believe that banks in the Gulf countries will come out stronger, if they continue to invest in future capabilities, while building resilience in the face of medium and long-term risks”.
