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Stable market environment puts Saudi banks on growth path

Saudi banks have shown stable development over the past years, and have not witnessed the growth exaggerations or the sharp declines seen in other markets. This stable market environment will provide them with good growth opportunities in the coming 2 to 3 years, according to Reinhold Leichtfuss, a senior partner and managing director in The Boston Consulting Group's Dubai office, and head of BCG's Financial Institutions Practice in the Middle East and the European Retail Banking Practice.
GCC banks are enjoying a much lower cost to income ratio of 35 percent so far, as compared to 55-70 percent in the United States and Europe. This allows them to increase their already strong capital base internally. These banks have also not been as exposed to the financial crisis as the US and European banks. On the other hand, the Middle East banks have to continue to improve their processes in order to reach the automation and productivity levels of international banks. "As competition increases and margins decline, these improvements will be necessary," said Leichtfuss who has over 27 years of experience in consulting financial services companies in all areas of expertise and worked for financial institutions in the Middle East, Asia, Europe and the United States.
According to a new BCG study, the banking industry in the Middle East settled at single digit revenue growth in 2012 with a 6.9 percent increase. Asked for his expectations for this year, he said: "For 2013, we are expecting similar growth in the range of 5-8 percent across all countries. Some banks may even exceed this range."
Referring to profits of the Middle East banks that increased 8.1 percent last year, he added that banks are working at restricting cost growth and have benefited from declining loan loss provisions in most countries. "Thus, the increase in profits was expected at about the rate of the revenue growth. We expect this trend to continue in 2013."
Leichtfuss, who has developed numerous concepts in retail banking and is the lead author and editor of the book "Achieving Excellence in Retail Banking" and the report "The Future of Retail Banking," pointed out that GCC banks have improved their products and services offerings significantly in recent years and are offering a broad range of services. "However, the product range is not yet as broad as it is with international banks. This is partially driven by the fact that customers are not yet demanding as much in terms of investment opportunities. Increasingly, ME banks are offering product innovations, though it would be a stretch to say that they are more innovative than international banks," he added.
Leichtfuss has multiple project experience in all areas of retail, private and corporate banking as well as in all functional areas such as strategy, organization, positioning, marketing and sales, distribution, process optimization and credit. He accompanied several bank and insurance mergers and published about the golden rules of merger management.
Banks in GCC countries achieved above 7 percent profit growth rates, except in Kuwait with 3 percent. Asked whether he expected banks to maintain the same growth in profits in 2013, he said: "In principle the same growth profits should be seen in 2013, as declining provisions in most countries is likely to support this growth.
Explaining the role of GCC banks in Shariah-compliant financing, Leichtfuss said: "Shariah-compliant financing is playing a significant role, ranging from 25 percent to almost 100 percent prevalence in most GCC countries.
About the impact of the Arab Spring on regional banks, Leichtfuss said: "During the unrest we have seen more money flow into GCC countries. At the same time, we are seeing further expansion of GCC banks into Egypt and other countries in North Africa. Within 3 to 5 years we will see a number of banks in stronger positions in several MENA markets."
Asked whether the UAE banks had learned a lesson from the 2008 financial debacle, Leichtfuss said: "Almost all banks in the UAE have indicated that they have learned from the experience. It is important to note that most of the UAE banks were by far less interwoven in the international financial streams than international banks, and were therefore less affected."
Explaining how the ME banks are measured in BCG index, Leichtfuss said: "Firstly we measure the top line developments in terms of revenues, i.e. operating income before cost, and the bottom line development in terms of profits. In addition, we look at the development of loan loss provisions as well as the development of costs. Using 2005 as the base year set at a score of 100, we have been measuring the developments in the industry over time as an index. This approach gives individual banks in the Middle East a good chance to compare their progress against the index and market as a whole, but also to take note of the developments of international banks."

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