DUBAI, 12 June 2007 — Despite the unprecedented growth and profitability witnessed by banks in the Gulf Cooperation Council (GCC) countries, “GCC banks are still small compared to the big international banks and eventually will need to grow externally to compete,” one of the world’s leading management consulting firms in the financial industry said in a study that examines the GCC banking industry and its future challenges.
Dr. Alexander von Pock, manager of financial services at A.T. Kearney consulting firm, said “local banks should start now to prepare for the challenges ahead.”
The study found out that the banking assets per capita are still relatively low in most GCC countries, leaving ample room for growth for all participants. “Thus the factors that normally set off mergers are conspicuously absent,” it said.
The study comes at a time where imminent mergers and acquisitions are making headlines.
Mergers tend to occur when the margin for organic growth is extremely tight, forcing participants to seek out external acquisitions instead, but the banking markets in the GCC recorded exceptional growth.
“We examined four areas that typically point to industry consolidation and found little evidence that a merger wave will occur in the GCC banking industry. As an example, relevant indicators show that domestic markets are already consolidated,” said Dr. Dirk Buchta, vice president and managing director, A.T. Kearney, UAE. Yet, if domestic markets appear consolidated, the picture changes on a regional level. While certain banks might dominate the market in certain countries, no single bank stands out in the region as a whole. Regionally, the top three banks account for just 14 percent of market share.
All GCC countries are members of the World Trade Organization (WTO), which means they are expected to open up their banking sectors to allow foreign competition.
For example, UAE stopped granting licenses to foreign banks in 1982 and now restricts these banks to just eight branches.
The only exception is the Dubai International Financial Center (DIFC), where 100 percent foreign ownership is allowed.
“Given the significant competition among the GCC countries — and in the case of the UAE, among the emirates — we expect considerable opposition to mergers and acquisitions across countries or emirates, but the regional banks are only shielded for a limited time from the international competition,” Buchta further said.
Aging assets and high demand for oil are driving the need for considerable investments into new productive oil and gas capacity.
Given the magnitude of the investments required, there are increasing calls for project finance and long-term structured funding solutions.
GCC banks are sidelined as “fringe” players and are effectively shut out from margins accruing to the more established global project finance players.