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20 July 2024

Gulf's private banks face challenges

By Nitin Nambiar


Margin pressures, eroding prices and rapid product commoditisation are among the key challenges faced by foreign players looking to enter the Gulf’s increasingly competitive private banking industry, global management consultant Boston Consulting Group (BCG) has said in its latest report on global wealth management and private banking.

Global wealth grew by 7.5 per cent in 2006 to reach $97.9 trillion (Dh359trn), marking the fifth consecutive year of expanding wealth, according to the BCG report. “Given the positive outlook for underlying growth, we expect assets under management to continue their steady rise,” BCG said in the report.

“Dubai is clearly continuing its consolidation of the wealth market, attracting more and more foreign and local players,” Christian de Juniac, senior partner and managing director, BCG, told Emirates Business. “Economic liberalisation has stoked competitive fires across the region’s wealth markets, and nearly all major international players are at some stage of establishing representative offices or onshore branches.”

According to the report, foreign players face additional challenges, including growing competition from Islamic banks whose Shariah-compliant products often mirror both the performance and the variety of conventional offerings. “In terms of assets Islamic banking represents about 15 to 20 per cent of local retail banking markets in the GCC,” the report said. BCG expects this proportion to grow to at least 25 per cent over the next decade.

According to BCG, many conventional banks in the region are converting to Islamic banks, and some global players have established Islamic windows to meet increased demand from the public and private sectors. “Islamic banks are more profitable than conventional banks, because their funding costs are generally lower as a result of government subsidies,” the report said.

According to De Juniac, who co-authored the report, the growth in the Gulf private banking sector is mainly driven by economic activity and the price of oil.

“There is greater demand for Shariah-compliant products especially after the Gulf banks started offering Shariah products. Foreign banks too have been expanding their offerings. As a whole Shariah-compliant products have been growing strongly but this is mainly an expression of the overall growth of the market and the increasing proportion of investments going into Shariah-compliant products,” De Juniac said.

The other big challenge for private banking players in the Gulf, according to De Juniac, is the region’s skills shortage. “Wealth managers in the region, particularly new entrants, also face a tightening market for talent. With a growing number of players converging on a limited talent pool, many wealth managers struggle to maintain service levels and continuity in client relationships,” the report said. The major shortage is for relationship managers and back office staff, said De Juniac. “Compensation costs have soared. RM salaries doubled last year and turnover rates are high.”

He said the regulatory framework for private banking in Dubai was in keeping with global standards.

According to the report, Dubai serves as an attractive entry point for wealth managers because foreign players can establish a presence at the Dubai International Financial Centre (DIFC), which offers world-class regulation and its own judicial system, allows for full foreign ownership and profit repatriation, and is tax-free,” the report said.

“Foreign players that utilise the DIFC, however, are shut out of the local retail banking market, which includes individuals who have less than $1 million in net assets and small businesses with less than $5m in turnover. Those foreign foreign players are also restricted from participating in the UAE’s primary insurance market,” BCG said.

According to De Juniac, wealth managers in general are finding it tough to attract new money. GCC clients often use banks for advisory services, but many prefer to invest their liquidity in booming real estate opportunities.

According to BCG’s latest survey of global wealth, assets under management (AuM) was concentrated in certain regions – North America and Europe, in particular – and among wealthy households, which BCG defines as having more than $100,000 in AuM.

In 2006 about 9.6 million households around the world had more than $1m in AuM, an increase of 14 per cent from 2005. “These were the richest 0.7 per cent of households, and they owned $33.2trn – or about one-third – of global AuM.

The survey revealed ongoing shifts in investment preferences in the Middle East, where the proportion of onshore AuM continued to rise, according to the BCG report.

The survey also revealed strong growth of wealth in emerging markets – especially China and Brazil.

North America and Europe had the deepest pools of wealth, $36.2trn and $33trn, respectively. Combined, these countries accounted for 27 per cent of all households and 71 per cent of global AuM. The next-largest wealth markets were Japan and the rest of Asia Pacific, with $11.9trn and $10.6trn in AuM, and the Middle East and Africa, with $2.9trn in AuM.

Asia-Pacific (excluding Japan) and Latin America had the strongest gains in AuM at 12.8 per cent. AuM in the Middle East and Africa grew by 8.9 per cent. North America also posted above-average growth at eight per cent while European AuM achieved a 5.8 per cent gain.

Measured in US dollar, global wealth grew by 11.7 per cent last year, due to a weak US dollar. The currency effect was strongest in Europe, where AuM growth was 11.8 percentage points higher when measured in US dollars.

A profitable year

Although 2006 was a profitable year for most players, profitability varied significantly among regions.

Survey participants had a median pre-tax profit margin of 34.7 per cent with less than five per cent reporting a loss, Boston Consulting Group said in its report.

Players in Latin America had the highest median pre-tax margins – around 55 per cent, up from around 49 per cent in 2003 – while the performance of players in Asia-Pacific tapered off.

Median pre-tax margins in Asia-Pacific, having soared from 27 per cent in 2001 to 46 per cent in 2003, attracted more competition and increased the cost of serving clients.

North American banks, meanwhile, increased their median pre-tax margins from around 26 per cent in 2003 of around 29 per cent in 2006, while the median pre-tax margins for brokers fell slightly, from around 12 per cent to around 11 per cent.
According to the BCG survey, players achieved strong performance irrespective of geography or business model.
Oil prices drive growth

The average AuM of wealthy households in the GCC region was close to $1 million in 2006, compared with the global average of less than $400,000.

“The rise in oil prices has been a major driver of economic growth in the GCC, but governments have also been diversifying their economies to develop sustainable income sources beyond the oil industry,” BCG said in its global wealth report.

“Nearly all international players are currently working to establish representative offices or a more substantial presence in the GCC. Many face a challenging and highly competitive environment,” de Juniac said.

Entrenched foreign players have already proved their commitment to the region, while local players can leverage both their close relationships with leading families and their widespread banking networks in the region, according to BCG.

Fierce competition has also led to eroding prices, product commoditisation and a tightening market for talent. BCG said foreign players must also contend with growing competition from Islamic banks, which offer products that are not only compliant with Shariah, but also, in many cases, mirror both the performance and variety of conventional offerings.

However, some factors, such as the need to attract talent and build strong client relationships apply to all players, both international and regional.

Entrants to the banking industry in the Gulf will need to pay particular attention to understanding the needs of local clients, networking to build strong credentials, and showing a clear commitment to the region – with a comprehensive portfolio of products, said BCG.