GCC retail banks brace for subdued revenue growth

The retail banking sector in three key economies in the GCC is expected to record subdued revenue growth till 2024 compared to the robust increase during the five-year period before 2019.

Boston Consulting Group said in the UAE, Saudi Arabia and Kuwait the retail banking revenue growth in 2019-24 period, even in a quick-rebound scenario, would only be at a compound annual growth rate of 1.6 per cent or from $26.4 billion to $28.6 billion in 2024. The growth rate is subdued when compared to the strong growth recorded in 2014–2019, at a CAGR of 5.5 per cent.

However, in a slow-recovery scenario, the revenue growth is expected to shrink by a CAGR of minus 0.1 per cent to $26.3 billion while in a deeper-impact scenario, the revenue pool is projected to shrink by a CAGR of minus 2.1 per cent, BCG said in its report, “Global Retail Banking 2021: The front-t-back digital retail bank.”

“The pandemic has taken a toll on the retail banking sector, and we believe that a the slow-recovery scenario is most likely to occur for GCC retail banks,” said Godfrey Sullivan, managing director and partner, BCG.

“In this scenario, the revenue pool of regional retail banks will approximately reach the 2019 level only by 2024, essentially a flat market.”

The most affected retail banking products in regional banks because of the pandemic are consumer loans and deposit revenues. While loans (mortgages and consumer loans) and deposits accounted for 80 per cent of retail banking revenues in 2019, recent events highlight that payment, mortgage, and investment products are now likely to be the main sources driving retail banking revenue growth. The acceleration of digital payments and e-commerce adoption in the GCC will be a factor to contribute and benefit the revenue growth.

According to global credit rating agency Standard & Poor’s, the UAE’s banking sector recovery from the impact of the pandemic will be gradual in 2021.

In a recent report, the rating agency said banks’ asset quality will likely deteriorate and the cost-of-risk to increase further as they start recognizing the impact of 2020's shockwaves. “Given continued low-interest rates, banks’ profitability will remain low in 2021 with a few banks potentially showing losses,” analysts at S&P said.

Sullivan said in a low revenue growth market, bank growth comes from taking the market share, and they compete by providing more appealing and relevant offerings, which is better for the end-users. “With shifting consumer preferences and increasing population growth, a lot more focus on better implementation of data and analytics in the organization and cross-selling their full breadth of products to their existing customer base is key to remain competitive.”

BCG said in the current market conditions, retail banks face tremendous challenges to improve customer experiences, grow revenue, build sustainable capabilities, reduce costs, and enhance the quality of their controls. “They must start to reimagine their strategies and consider a new cost paradigm, digital value streams, and a stacked operating model,” said the report.

The retail bank of the future requires organisational change and building digital capabilities, which takes time, it argued. “With low interest rates likely to continue, fee income becomes key, including enhancing wealth management offerings as banks look to advise their clients on better ways of growing and protecting their wealth.”