GCC banking sector thrives amid ongoing industry crisis in US and Europe

By Puja Sharma

According to the EY MENA H1 2023 Banking Report, the region experienced a remarkable year on year (YoY) growth with a 30% surge in net profits and a 12.2% increase in net assets. Meanwhile, YoY returns on equity recorded a rise of 6.18%, and the net interest margin grew by 0.2%.

This robust performance extended to the region’s banks, which witnessed an 18.8% growth in operating income. Total deposits have increased by 6.08%, and the loan-to-deposit ratio (LDR) is up by 5.43%.

Non-performing loans (NPLs) are expected to remain at the current levels in 2023, with banks adopting a selective approach to lending. Regulatory oversight will be in the spotlight this year with the ongoing implementation of Basel IV regulations and a heightened focus on battling financial crime, electronic know your customer (eKYC) processes, anti-money laundering (AML) and cybersecurity. The industry can also expect further acceleration of financial market infrastructure initiatives such as EKYC platforms and open banking initiatives across the GCC to continue.

Charlie Alexander, EY MENA Financial Services Leader, said, “With limited effect to the ongoing banking industry crisis in the US and Europe, the GCC banking sector has undergone a fundamental transformation and is now pursuing a strong upward trajectory, boosted by an increasing demand for lending. This development is playing an increasingly important role in the region’s overall economic growth amidst ongoing economic diversification drives. Another positive trend is the pursuit of net-zero roadmaps by most GCC countries, which has led to a rise in the demand for sustainable finance, a key enabler of the transition to clean energy.”

The outlook for the region has been strengthened by robust oil and gas prices and a major boost in non-oil activity, which has also supported credit demand. Other prominent trends dominating the banking sector include robust fiscal condition, government investments, an anticipated improvement in the global economic landscape and technological advancements.

Digital banking solutions on the rise

Digital transformation is the future of the MENA banking sector. Artificial intelligence (AI) is reshaping the financial services industry in the region, bringing faster and more personalized banking services through chatbots. Among other priority areas are digital banking, mobile payments, open banking, tokenization, digital currencies, blockchain and sustainable finance. Banks are also developing new customer experience initiatives aimed at shifting competition away from products to lifestyle banking. This includes introducing chatbots and loyalty programs, in addition to leveraging the latest customer analytics tools to improve their offerings.

MENA banks are increasingly investing in digital banking solutions to address the ever-evolving needs of their customers while balancing customer experience and risk management. By strengthening their risk management technologies and systems, banks are boosting their ability to withstand potential financial risks and comply with regulatory requirements.

Meanwhile, front-to-back modernization, cloud migration and robotic process automation can help banks establish connections between customer-facing operations and back-end servicing, minimizing inefficiencies.

Tech advancements are reshaping the UAE’s banking sector

The banking sector in the United Arab Emirates (UAE) is experiencing significant growth. The 2022 financial results indicate an increase of 31% in net profits and total assets, driven by strong growth in deposits, loans and advances, and a boost in net interest income. The substantial investment of approximately AED131 billion in technology initiatives by the UAE banking industry has played a key role in attracting digitally savvy customers from the ranks of individuals and businesses.

The study predicts that GCC banks will remain resilient in 2023. Economic conditions are poised to improve as the oil price is projected to sustain and enable governments to support the economy. Meanwhile, inflation is likely to subside due to higher interest rates.