BrazilMcKinsey: GCC banks outperform their global counterparts
Over the past years, GCC banks have outperformed their global counterparts and looking ahead, the region’s banking sector is in a good position to continue its growth, according to analysis by McKinsey & Company.
Amid overall record economic performance, the GCC region is riding high – and the financial sector is no exception. Part of the banking sector’s upswing has to do with the overall economic boom in the GCC, but another component is the current world financial state.
All GCC exchange rates are either directly or indirectly pegged to the US dollar, and regional interest rates thus closely track movements in US rates. As the US Federal Reserve’s monetary policy drove up financing costs in the GCC during 2023, local and global bank profits soared.
While in other regions, high interest rates coupled with geopolitical uncertainty and more led to pullback in nationwide spending, the GCC bucked the trend, on the back of expansive Vision 2030 agendas. As a result, lending, mortgage and other activities of banks remained healthy, with regional returns well above the global average.
On average, GCC banks managed to surpass the global average in return on equity (ROE) by three or four percentage points.
Historically low valuations and declining price-to-book ratios still characterize the global banking industry, but GCC banks are creating value by delivering ROE above their cost of equity. Meanwhile, elevated interest rates have pushed banking profits – both in the region and globally – to record highs.
GCC banks also have maintained net interest margins that are well above the global average. The revenue-to-assets ratio for GCC banks is 3.2%, well above the global average of 2.3%. This gap reflects both the region’s wider net interest margins and its superior net interest income of 2.3% compared with a global average of 1.4%.
McKinsey & Company said that GCC banks are also better capitalized than the global average. Average ROE among GCC banks is 10.9%, significantly higher than the worldwide average of 9.0%, though there is some elevated risk.
“A positive macroeconomic environment has shielded GCC banks from post-pandemic shocks,” stated the authors of the report.
“High hydrocarbon prices, rapid growth, low unemployment rates, favorable demographics, ambitious public investment programs, and moderate inflation have combined to support strong balance sheets and solid margins. GCC banks are more profitable than their peers in developed (and many emerging) markets, and they are still growing rapidly.”
Overall, GCC banks have proven to be remarkably resilient to global shocks, like geopolitical instability and political sparring that hurts trade. The global banking system faces mounting headwinds over the medium term, but GCC banks seem to find themselves in a strong position to weather future shocks.
Previous analysis from Alvarez & Marsal found that major banks in the UAE have improved their financials over the past year, while another study, from Boston Consulting Group, painted a rosy picture of the future of Saudi Arabia’s banking sector.
