The road ahead for banks in the GCC region: 7 priorities

GCC banks are currently in strong shape, and have over outperformed their global counterparts over the past several years. Yet remaining in good shape will require continued focus on strategy and operations – a new report from McKinsey & Company outlines seven priorities for the road ahead.

The financial sector in the Gulf Cooperation Council (GCC) has managed to outperform the global average on several financial metrics, according to the McKinsey & Company study, including on return on equity (by three or four percentage points), margins, and cost-to-asset ratios.

Looking ahead, the GCC banking sector is well positioned to handle macroeconomic uncertainty and future challenges, but falling into complacency would be dangerous.

In its report, McKinsey & Company outlines seven priorities that banking executives should be focusing on in the coming period:

1) Manage uncertainty around interest rates
High interest rates have boosted revenues and margins for GCC banks, but also require strong internal safeguards to manage risk. GCC banks should enhance asset-liability management and conduct stress tests to ensure resilience in a volatile interest rate environment, focusing on depositor behavior and maintaining balance sheet health.

2) Increase operating efficiency
GCC banks have a relatively high level of operational sophistication, but there are still a lot of back-end processes that they should work to streamline. One way to do that is through automation, which would open up employee time and energy to more important tasks.

“Digitalizing these processes and automating routine tasks will allow banks to use their human resources more efficiently. Gen AI and machine learning applications can automate an expanding range of complex back-office processes, sharply reducing operational costs,” said the report.

3) Transform the customer experience
The GCC region has a relatively young population, which means regional banks will have to pursue digital transformation to keep up with increasing consumer demand for flexibility, ease-of-use, and better customer service. Any successful digital transformation strategy will need to incorporate AI – especially in the area of customer service.

Several banks in the UAE and in Saudi Arabia have already moved towards fully digitalizing their customer journeys. In addition to that, new players (including digital banks and fintechs) are changing the retail banking landscape by presenting consumers with innovative and customized products at a lower cost.

4) Stay focused on ESG
Environmental, social, and governance (ESG) investment needs to be seen as an opportunity, not simply a requirement or a liability. There are positive signs that the GCC financial sector is increasingly on board.

For example, two of the top five banks in the UAE have joined the UN’s Net-Zero Banking Alliance, and most of the top banks in Kuwait, Saudi Arabia, and the UAE have established sustainable finance frame-works within the past 5 years.

5) Boost M&A and restructuring
Historically, M&A transactions have yielded higher returns during economic downturns, scoring wins for companies in boosted growth, revenue generation, and market expansion. Recent examples include major mergers like the formation of Saudi National Bank or Kuwait Finance House's acquisition of Ahli United Bank.

Many GCC banks have also been exploring fintech acquisitions and divestitures to boost efficiency and refocus on core operations.

6) Staying competitive in the digital world
GCC banks can diversify revenue by moving into areas like open banking and embedded finance, which call for a shift toward technology-driven operating models. Key strategies include adopting cross-functional teams, agile project planning, and advanced engineering practices, all of which can help to significantly improve customer experience and operational efficiency.

7) Modernize core technologies beyond digitization
To maintain competitiveness in the global financial landscape, GCC banks need to modernize their systems to be more customer-centric, data-driven, and able to facilitate rapid integration and deployment of customized products. These systems will need to feature rigorous cybersecurity measures like zero-trust architecture, DDoS protection, tokenization, two-factor authentication, and biometric identification, which have become crucial for mitigating digital risks effectively.

“Underpinned by strong domestic economies, favorable demographics, and supportive government agendas and regulatory frameworks, GCC banks are well positioned for continued expansion and diversification,” said McKinsey.

“While the global macroeconomic landscape remains uncertain, we believe GCC banks will emerge stronger if they continue to invest in the capabilities of the future while also building resilience against medium and long-term risks.”