The Optimists View of GCC Banking

With the exception of geopolitics, this would represent a pattern of more of the same for the GCC, which has experienced a gradual surge in oil prices and revenues, peaking last year.

For 2006, the outcome was a lower average oil price than in 2005 and, with production also down, slightly lower oil revenues for the first time this century.

Regional stock markets sensed this reduction in the growth of liquidity and crashed from retail investor driven highs last year. These crashes have left a legacy of debt estimated at around $10bn by Deutsche Bank in the UAE alone, but these debts are being serviced so do not yet count as bad debts.

These stock market crashes also impacted directly on the banks which had profited handsomely from a spate of massively oversubscribed initial public offerings. This consequently left the local banking sector largely ex-growth in 2006.

Growing competition

The question then is will the good times return for the banks under our optimistic assessment of the business outlook? The omens are not that good. For a start the recent boom has stoked up a great deal of new competition in the banking sector, whether highly capitalised new local players or the giants of the global industry looking for new markets.

Indeed, the creation of the financial free zones in Dubai and Qatar, and the licensing of foreign financial institutions in Saudi Arabia is all a part of increasing capacity. Banks have to ask: is the cake growing bigger fast enough for everybody looking for a slice?

Other things being equal, with high oil prices maintaining liquidity and sustaining the real estate boom for a while longer, there probably is enough cake to go around.

The banks also then have the opportunity to develop their next big product: home finance. For as the real estate sector delivers its large volume of homes over the next couple of years, local banking has a great opportunity to expand into what is for most national banking sectors their most lucrative area.

Home loans

In fact, home loans could be a far bigger source of income than the financing of stock market speculation or even IPO fees. Mortgage business is also far more stable as people are always most reluctant to give up their homes, and typically finance for 15 years or more.

Moreover, there is room for product differentiation in home loans, unlike other business areas like credit cards where consumers are less and less excited by yet another rewards scheme.

Thus under an optimistic economic scenario we could see banks muddling through against increased competition with real estate as the big opportunity for those with the right products.

See also:
How will the GCC banks cope if the future is bleak?