GCC corporate banking profitability is on its way to recovering from the turmoil of the financial crisis, The Boston Consulting Group (BCG) said recently. Its Corporate Banking Benchmarking Report said 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 percent 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 percent per year since 2009. The UAE is the only other country which has shown a small but upward trend in profitability, increasing by 3 percent from 2010 to 2011. Most of the top corporate banking executives from some of the largest banks in the GCC surveyed believe that the overall GCC GDP will grow between 5 percent-10 percent in 2012 and 2013 with Qatar and Saudi Arabia leading the way with over 10 percent and 8 percent-10 percent, respectively. The UAE, Oman and Kuwait are also expected to grow, though at lower rates, between 3 percent and 5 percent. Bahrain was the only GCC country expected to experience decline. 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 percent 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. “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 eurozone 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” since 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. Moreover, competition for corporate banking clients will intensify as the economy begins to improve. Large corporate clients, defined as companies with over $150 million annual turnover, have traditionally been a primary focus for most corporate banks. However, medium cap clients, defined as companies with annual revenues between $25 million and $150 million, 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,” Massi said. 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,” Massi further said.
