Markus Massi, Partner and Managing Director and BCG's regional leader in Wholesale Banking and Capital Markets
GCC corporate banking profitability is on its way to recovering from the turmoil of the financial crisis, according to a latest report by The Boston Consulting Group (BCG).
According to the firm’s recently released, Corporate Banking Benchmarking Report, as Loan Loss Provisions (LLPs) peaked in 2009, corporate banking profitability consequently declined to levels below those of 2007. However, LLPs began to decrease in 2010 and have continued to decrease in the first half 2011. “This has resulted in a corporate banking profitability increase of over 40% from 2009 levels even as revenues have remained flat throughout 2009-2010, and the first half of 2011,” said Markus Massi, Partner and Managing Director and BCG's regional leader in Wholesale Banking and Capital Markets.
Saudi Arabia has been at the forefront of this upward profit trend with the greatest annual increase in corporate banking profitability at 45% per year since 2009. The UAE is the only other country which has shown a small but upward trend in profitability, increasing by 3% from 2010 to 2011(E).
Other GCC countries have shown a flat trend in profitability with the exception of Bahrain which has continued its downward profitability trend since 2007, decreasing at 24% per year up to the first half of 2011. Revenues for all GCC countries remain relatively flat, again with the exception of Bahrain which is showing decline in revenues. These country-specific profitability trends are driven largely by varying decreases in LLPs from year-to-year in these countries.
Corporate Banking executives optimistic about the future of GCC corporate banking
BCG surveyed top Corporate Banking executives from some of the largest banks in the GCC to get insights into their expectations and to understand how banks are gearing up to take advantage of the upcoming trends in corporate banking.
Most of the executives surveyed believe that the overall GCC GDP will grow between 5%-10% in 2012 and 2013 with Qatar and KSA leading the way with over 10% and 8%-10% respectively. The UAE, Oman and Kuwait are also expected to grow, though at lower rates, between 3% and 5%. Bahrain was the only GCC country expected to experience decline.
"Although overall GDP growth is expected, executives indicated that key risks still loom in the GCC which primarily include regional instability, insufficient government infrastructure spending, and events in world markets (especially the Euro zone crisis)," said Mohamed Turra, Principal in BCG's Dubai office and co-author of the study.
He added, “The impact of new regulations or compliance with Basel III is estimated to be minor.” This stems from the fact that most GCC banks already enjoy a high capital adequacy ratio and have cleaned up their investment portfolios back in 2008 and 2009. As a result, Corporate Banking executives expect corporate banking revenues and profitability to increase from higher loan volumes and margins and from further declining LLPs.
Competitive pressures will increase for corporate banks as most of the banks shift towards untapped customer and product segments at the same time
Competition for corporate banking clients will intensify as the economy begins to improve. Large corporate clients, defined as companies with over $150M annual turnover, have traditionally been a primary focus for most corporate banks. However, medium cap clients, defined as companies with annual revenues between $25M and $150M, are expected to be a major area of growth for many corporate banks. "This is due to two factors: first, banks traditionally focused more on the large cap segment as the economy boomed leaving the medium cap segment relatively untapped. Second, medium sized corporations are mainly family-owned and have traditionally relied less on products and services of corporate banks," said Massi.
On the product side, no significant growth opportunity in the traditional loan business is expected as executives expect an ongoing hesitation to increase lending capacities. On the other hand, growth is expected in non-traditional products, e.g. transaction banking, deposits and structured finance/bonds.
Overall, competition continues to intensify as most of the GCC banks start to focus on the same client segments and growth products simultaneously. "Developing industry-specific solutions, fast turnaround time and a structured sales and services approach will be key success factors for local banks to compete in the market," said Massi.
Going forward, corporate banking executives shift focus – from managing loan books toward managing client relationships
BCG also surveyed Corporate Banking executives on 15 best practice levers which corporate banks can pull in order to improve business attractiveness and results. Overwhelmingly executives were of the opinion that over the three-year period between 2008 and 2010 banks have focused on containing the effects of the crisis while in 2011 and beyond, they have begun and will continue to shift their focus to the future, specifically on building people and system capabilities.
In 2008/2009, as the crisis emerged, corporate banks quickly responded by reducing loan book volumes and increasing loan margins and collaterals. Subsequently, corporate banking units have used the opportunity, especially in 2010, to improve staff quality rather than simply reducing staff volumes.
In 2011, as loan and staff quality enhancements continue, corporate banking executives plan to shift their attention towards qualitative measures and the professional management of the client relationship. "Increased competition, focus on lower customer segments and non-traditional banking products will require a standardization of sales and service processes and increased cross-sell capabilities almost in a retail-like style", Massi explained.
GCC corporate executives acknowledge the gaps they have in capabilities and capacities required for successful and sustainable implementation. The main focus areas for 2012/2013 (e.g. customer intelligence, account planning, structured sales processes) are actually the areas with the lowest level of sophistication in GCC banks compared to regional/international peers.
"International best practices show that a standardization of customer sales and service processes and insightful, fact-based customer intelligence are key drivers for success", said Massi. "Winning corporate banks in the GCC will not only have to develop compelling industry solutions, but will also have to excel in driving implementation and cultural change during the next 2-3 years," concluded Massi.