GCC banks could become victims of their own success

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, thus forcing participants to seek out external acquisitions instead, but the banking markets in the GCC have witnessed unprecedented growth and profitability. 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.

'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.

'GCC banks are still small compared to the big international banks and eventually will need to grow externally to compete. Local banks should start now to prepare for the challenges ahead' said Dr. Alexander von Pock, manager financial services, A.T. Kearney.

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, in Saudi Arabia foreign banks are not allowed to operate branches in the country and in the 1980's existing foreign banks were turned into joint-ventures with a minimum of 60 percent Saudi ownership. The 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 Centre (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,' concluded Buchta.