Home Banking GCC Banking Outlook 2024: Navigating Opportunity, Embracing Change

GCC Banking Outlook 2024: Navigating Opportunity, Embracing Change

by internationalbanker

By Asad Ahmed, Managing Director and Co-Head of Middle East financial services, Alvarez & Marsal

 

 

 

 

The year 2023 brought strong growth to the GCC (Gulf Cooperation Council) banking sector, defying global trends. The news from the United States and Europe was mixed, with banks posting good growth in most cases, though tempered by the overhang of commercial real-estate exposures that caused higher provisioning and a few cases of one-offs related to restructuring and replenishment of FDIC (Federal Deposit Insurance Corporation) insurance funds.

Looking ahead, the region’s GDP (gross domestic product) growth is projected to strengthen to 3.7 percent, fuelled by robust oil prices and vigorous non-oil activities. This follows a year of more modest growth in 2023, compared to a remarkable 7.9-percent rate in 2022. With healthy capital adequacy and relative insulation to date from global troubles, the question arises: What does 2024 hold for the GCC banking sector?

Digital transformation

One of the defining topics for the year ahead will be facing up to the transformative power of digital technology. The GCC banking sector is well on the cusp of a digital revolution, with generative artificial intelligence (GenAI), industry convergence, embedded finance, open data, money digitization and digital identity set to reshape the landscape.

Automation and innovative technologies, including the growing recognition of the value of partnerships with fintechs (financial technology firms), offer banks the opportunity to reduce operating costs and improve customer service. However, the more advanced versions of these technologies present various challenges. The advent of deepfakes, for example, could lead to increased fraud levels. There will also be associated regulatory risks relating to, among others, the ownership and use of content, customer data and the efficacy of the models themselves. Clearly, we should expect the regulatory framework to rapidly develop to respond to the changing landscape.

Cloud adoption will also be a key driver of this transformation. With strong economic fundamentals, government support and a pressing need for innovation, the value of the Middle East public cloud market is expected to reach US$9.9 billion by 2027, growing by 20.7 percent during this period.

Today’s customers, particularly the young and tech-savvy, demand seamless, personalized banking experiences. Cloud technology enables banks to develop and deploy innovative products and services faster. Combined with scalability, flexibility and reduced infrastructure costs, the result, in brief, is better resource optimization, improved operational efficiency and higher customer satisfaction. It is also laying the foundations for the rise of open banking, which is built entirely on cloud infrastructure.

GCC regulations are at various stages of development regarding cloud adoption. This will likely be a focus for the year ahead, as data security and privacy remain major concerns. Close collaboration between regulators and cloud providers is required to ensure compliance with local regulations and, eventually, the adoption of local clouds. Integrating cloud solutions with existing legacy systems can also be challenging, requiring careful planning and execution. As both banks and regulators navigate this new environment, finding and retaining cutting-edge talent will continue to be a key concern across the industry.

Fintechs at the gate?

Despite volatility in the global market, regional banks have benefited from strong operating conditions. This resilience is largely due to solid capitalization, improved profitability and sound asset quality.

However, fintechs are likely focusing on every aspect of the transaction value chain, leading to a rapid change of approach. From what was considered competition between banks and fintechs, we now have a conscious era of partnerships between the two; there are clear examples of customer experience and productivity uplifts where these collaborations have been successful. Tony McLaughlin, head of emerging payments and business development at Citi, has used the analogy of fintech disruptors as “barbarians at the gate” who were then invited inside the city walls for cups of coffee.

Partnerships notwithstanding, there are arguably an increasing number of areas in which we see fintechs encroaching on specific functions that traditionally were largely within the banks’ domain. The most obvious one is remittances. With close to US$850 billion in annual market size and an average remittance cost of 6 percent, the business has increasingly moved to fintechs, which are now responsible for the majority of global remittances.

As AI systems improve at data mining to determine lending parameters and evaluate risks, a new market for retail lending and borrowing could also emerge, some of which could transcend geographical boundaries. In response to these challenges, traditional banks will have to shift their focus, which, until now, has been largely on the “front end” of banking services, concerning accessibility and usability. However, to compete with new services, a backend transformation is now recognized as equally time-critical.

Consolidation

The GCC banking sector, especially the larger banks in each country, had a solid 2023, and the smaller banks in the UAE (United Arab Emirates) have also reported record numbers. While the logic of some consolidation in the industry has merit, it does not appear that there is anything on the horizon, given this scenario.

In the case of insurance, however, there is perhaps a different picture. In 2022, the Middle East and North Africa saw more than 20 M&A (mergers and acquisitions) transactions, both in the KSA (Kingdom of Saudi Arabia) and the UAE—the two largest insurance markets in the GCC. There is a drive towards improved compliance with enhanced regulatory standards.

Implementing IFRS 17 (International Financial Reporting Standard 17), effective from 2023, requires much more granular reporting and stricter standards around capital adequacy. This will likely cause increases in operational costs, which, in a market with more than 75 percent of the players having a market share of less than one percent each, is likely to lead to some consolidation.

Sustainable finance

Sustainability has become a crucial topic for many corporations in the GCC region, including financial institutions. A reflection of this is the UAE banking sector’s recent pledge to mobilize US$270 billion (AED1trillion) in green finance by 2030.

This is a bold statement of intent, and banks are further detailing their ESG (environmental, social and governance) strategies to deliver on this promise. It would be ideal to see how this unfolds in a common measurable and accountable framework that quantifies the impacts of the implementation. Developing some clear rules would certainly place the GCC financial institutions in the leadership group of this arena.

Conclusion

Returning to our economic outlook for the year ahead, inflation is expected to cool, but there is an overhang of geopolitical events that may impact economic activity on some level.

Interest rates are expected to hold for now but gradually decrease throughout the year. As they decrease, net margins will shrink. However, there is generally a lag between lending rates and costs of funds, so this will be gradual. Given banks’ strong performances in 2023 (as released by January 31, 2024), we expect 2024 to be stable. However, there may be some weakening in asset quality given continued higher interest rates. In general, the sentiment is optimistic, though cautious, as GCC banks are mostly well capitalized, profitable, liquid and well supported by their respective regulators.

This does not mean they can rest easy. As always, banks must be aware of potential challenges and adapt their strategies accordingly. The GCC banking sector is poised to navigate a complex landscape of opportunities and challenges. Embracing new technologies, adapting to evolving threats and contributing to sustainable development will determine its success in 2024 and beyond. The future belongs to those who can navigate complexities, seize opportunities and remain adaptive in a rapidly changing world.

 

 

ABOUT THE AUTHOR
Asad Ahmed is Managing Director of Alvarez & Marsal in Dubai, UAE. He has more than 30 years of experience in banking and credit management and in formulating and managing strategic and operational changes in financial institutions. Ahmed has led assignments ranging from operational-risk review at a major Gulf bank to corporate-debtor advisory.

 

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