UAE: Middle East banks perform better than global counterparts in profitability, efficiency

Middle East banks have performed better than their global counterparts in terms of profitability and efficiency, senior officials of a global consultancy said on Wednesday.

While speaking at the Banking, Innovation and Technology conference organised by Khaleej Times on Wednesday, Sheinal Jayantilal, partner, McKinsey & Company, said the global banking industry generated $1.15 trillion of profit in 2023 which is by far the largest, and nearly triple the next industry, which is energy.

“The scale and profitability of this industry is immense. But what matters is not necessarily the absolute profit but what is the return above and beyond the cost of equity. Since 2010 to date, the industry has been able to deliver returns above the cost of equity only in three years out of the past 13 years where interest rates skyrocketed and banks managed to make abnormal levels of profit. The $1.15 trillion is fantastic, but the reality is the banks cannot, or have not, historically, delivered above the cost of equity. As a result, banks are at 0.9 price-to-book globally, while all other industries are at 2.8 times. Therefore, the market is very pessimistic in terms of the value of banks as an industry,” Jayantilal said.

He added that the good news is that the Middle East as a region clearly stands out in terms of profitability and efficiency.

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“In the past 13 years, Middle Eastern banks have really consistently covered the cost of equity. The industry is obviously extremely profitable, efficiency levels are among the best in the world. So the GCC is a bit of a different story when we compare it to the global industry. If we just look at the total shareholder return, the GCC banks have significantly outperformed the global banking industry. So it's a much more positive message and outlook for the region,” Jayantilal said at the conference, where he shared the insights on the state of banking and fintech in the GCC region.

Leading in digital penetration

McKinsey & Company’s Jayantilal elaborated that the banks in this region are actually leading globally in digital penetration in terms of mobile activity, servicing capabilities and digital sales penetration.

“We've seen huge investments being done bank. All the banks have significantly stepped up and the region has surpassed Europe in many of these indicators.”

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