Middle East Banking Market: The 2011 Outlook
How GCC banks can outperform their peers
The Middle East banks continue on the path of recovery. Although the outlook for 2011 is positive, most analysts expect growth to be more subdued than in the past years. It is therefore essential for GCC banks to identify new strategies for growth and prosperity requiring a clear view on how to improve productivity and services while addressing new opportunities in retail banking, investment banking and new geographic regions. There are clear opportunities for GCC banks to outperform their peers.
The opening months of 2011 have seen a GCC banking market somewhat in recovery—a continuing trend that started in 2010, with overall GCC bank assets growing slightly faster in 2010 than in 2009. However, both growth and profitability remain far below pre-crisis levels and vary significantly among markets. For example, asset growth and profits fell in the UAE and Saudi Arabia in 2010, but picked up markedly in Bahrain, Kuwait and Qatar (see figures 1 and 2).
The outlook for the remainder of 2011 appears brighter; there is the promise of improved profits, reduced cost of risk, and a favorable macroeconomic environment further boosted by higher oil prices. Yet most analysts expect growth to be more subdued than in the past years. Planning for growth is difficult enough, but how does one plan for subdued growth? The question for GCC bankers is how to grow and improve profits in a year when their time-tested and proven strategies are likely not to work nearly as well. The answer is to focus on new strategies for growth and prosperity.
With this in mind, A.T. Kearney suggests five ways GCC banks can outperform their domestic market averages and ensure a brighter 2011 outlook.
Productivity: Move Beyond the Low-Hanging Fruit
While many regional banks have already picked the low-hanging fruit in terms of improving productivity such as capacity adjustments, few have made the more difficult but necessary structural adjustments. Even banks that (still) experience high double-digit growth rates, such as those in Qatar, will benefit from doing so. The following are examples of the "higher-hanging" fruits of productivity improvements:
Review the branch models and networks. This is long overdue as branch networks have been built up quite extensively over the past few years and frequently fall short of fully delivering anticipated results—often only differing in size rather than purpose. The ideal branch network has different branch models depending on what is required to meet customer needs, ranging from light, kiosk-style sales outlets focusing on retail mass customers to full-service branches covering all customer segments. Alternative branch models significantly reduce capital investments, operating costs and set-up times. They can be specifically powerful if coupled with alternative channels such as online banking or a direct sales force.
The question for GCC bankers is how to grow and improve profits in a year when their time-tested and proven strategies are likely not to work nearly as well.
Revamp business processes and organizations. Many bank processes in tho GCC are still mostly manual, involving a multitude of documents and layers upon layers of decision makers. Redesigned processes can yield significant efficiency improvements, in some cases ffltting resource requirements in half. And while automation may be key, it is not always required, particularly given the relatively low labor costs in the GCC.
Here, targeted IT investments are important. For example, debt settlement software can significantly support collections, and scanning systems can enhance collaboration between the front and back office. Importantly, aligning the entire organization on a bank's strategy and streamlining the structure can significantly improve efficiency.
Promote outsourcing and offshoring. Banks in mature markets have long used outsourcing and offshoring strategies as a means to centralize business processes, improve service levels and increase control. Although it is a relatively new concept in the GCC, several regional banks have successfully offshored less complex functions such as procurement to India and Egypt.
Focus on procurement savings. A structured approach to procurement (analyzing spend and identifying savings) can cut costs by up to 30 percent in some categories.
Service: The Key to Satisfied Customers
A main challenge facing regional GCC banks is to increase their customer share-of-wallet, as the average number of products and revenues per customer is still relatively low compared to developed markets (see figure 3).
To increase wallet share, customer satisfaction is key. Satisfied customers are less likely to leave the bank, are more open to cross-selling and are more likely to recommend the bank to others. Yet studies show that GCC banks generally do not focus on customer satisfaction. Consider that about 75 percent of U.S. bank customers are satisfied with the service they receive, while in the UAE, for example, only half of all domestic bank customers—and only 10 percent of expatriate customers—say they are satisfied.
Improving customer service begins with a framework in which the brand promise is aligned with every aspect of the organization—people, culture, performance metrics, processes and infrastructure. The two most important elements of improved customer service: instilling the concept of customer service throughout the bank's processes and in its sales approach.
End-to-end customer-service-oriented processes. How does a bank ensure that all its processes begin and end with the customer? Here again, business process reengineering is the answer. Although BPR is typically thought of as a way to root out costs in an overly complex business, it is also an ideal way to evaluate how processes within an organization work and, in this case, determine if they are designed with the customer in mind. For example, BPR can identify the need to improve turnaround times in credit applications or speed up response rates to customers' inquiries.
Customer-focused sales approach. In 2011, as competition becomes stiffer and bank customers have more options, it will be imperative for banks to adopt a more sophisticated sales opproach. Top banks need to reorganize their sales forces from a product focus to a customer segment focus, improving sales techniques and skills, and installing enhanced performance management strategies throughout their organizations.
Retail Banking: Picking Up Steam
Traditionally, corporate banking assets have made up the largest part of total banking assets (up to 70 percent) in GCC countries. But retail banking is fast picking up steam as a large and growing young population enters the work force (and starts their families), and as higher oil prices provide governments with more money to channel into the economy. With this in mind, GCC banks are offering new products in their retail banking segments. Mortgages are an area of new focus; and the evolution of the legal framework in the region (for example the advent of the mortgage law in Saudi Arabia) will spur demand for lending and adjacent products such as home and life insurance.
Products and services for small- to medium-sized companies are another potentially lucrative area for banks. To date, this is a largely underserved segment as SME banking often falls into the remit of the corporate banking division, which is typically ill-equipped to or not interested in serving this segment. Optimizing the lending process and establishing dedicated channels including relationship managers with strong SME expertise and sales focus are crucial. Moreover, linking SME banking and private banking in a smart way may persuade business owners to consolidate their personal and company needs in one bank.
Multichannel banking will be essential in 2011 and we do not mean simply having a range of different channels. Rather, the top banks will remain on top by realizing channel cooperation and organizational integration to keep costs down and customer satisfaction up. A single view of the customer across all channels obviously is paramount. The real measure of success will be when electronic channels such as online banking are used to sell products to new clients rather than only serving existing ones.
Capital Markets Take Off... Albeit Slowly
Corporate finance in the GCC has been largely based on bank credit and equity markets, with debt securities playing only a minor role. As the financial crisis forced banks to become more cautious in their lending practices, corporations had more difficulty gaining access to credit. In 2011, we anticipate a slow but clear disintermediation, whereby debt capital markets will play a larger role in corporate funding (This disintermediation will follow a pattern similar to more mature markets such as the United States and Japan). Also, Sharia-compliant structures such as sukuk are expected to help overcome cultural resistance to conventional bonds.
Disintermediation will offer regional investment banks an opportunity to grow, not only in terms of debt capital markets advisory and underwriting but also in asset-management and brokerage. In addition to a broader range of funding sources for corporations, this will bring other benefits, including more flexibility for fiscal and monetary policy makers and more choices for investors, including retail investors.
New Markets: Moving Beyond the GCC
While many of the largest banks have a presence in other countries, establishing a serious regional footprint continues to be difficult due to regulatory barriers in many GCC markets. As a result, the question of how to succeed beyond the GCC is a popular one in many boardrooms around the Middle East.
Most of the large GCC financial institutions have expanded into the broader, culturally conducive MENA regions, using both organic and inorganic growth strategies. In 2011, other markets will be seriously considered, for example, the CIS region (see figure 4). Success will be determined by the right expansion strategies, particularly for local banks that ensure that any international investment is not dilutive in terms of growth and profitability.
The Outlook
In these early months, the outlook for the GCC financial services industry and its players appears promising. As financial strength and robustness return to the market, the top players will be those banks that not only build on their operational improvements but also make the next round of investments in new products, new segments and new markets.
Authors
Cyril Garbois is a partner in the Middle East office.
Alexander von Pock is a principal in the Middle East office.
Mukund Bhatnagar is a consultant in the Middle East office.
Rebecca Hall is a consultant in the Middle East office.
Copyright 2011, A.T. Kearney, Inc. All rights reserved.
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