These results were released in a new study by The Boston Consulting Group (BCG) entitled “Creating Value in Banking 2011: Settling into the New Post-Crisis Equilibrium”. The results are based on the analysis of approximately 550 global banks and financial service companies listed on international stock markets.
According to the report, Kuwait and Qatar led the Middle East pack in 2010. Qatar was also least hit among GCC countries in 2008, while Kuwait came back from a negative TSR in 2009. Nearly all countries in the Middle East recorded a recovery in TSR since 2008 when the financial crisis hit the Middle East.
“This performance is a strong sign of the resilience of Middle Eastern banks and the region’s financial sector more broadly speaking. Having said that, the rise in TSR did come after a year of stagnating TSR in 2009; hence, an increase could be expected,” said Dr Reinhold Leichtfuss, Partner and Managing Director in BCG’s Dubai office and leader of BCG’s Financial Institutions practice in the Middle East.
“Overall, universal banks fared much better than specialized finance companies that were hit quite severely, not only in the Middle East, but also in other countries”. He also notes that despite these positive TSR developments, there are challenges ahead for the Middle East banks resulting from revenue and margin pressures. This trend will force banks to establish more efficient operating models,” he added.
Talking about the global trends he said that the industry’s market capitalization, following a 55 percent increase in 2009, grew by only 10 percent in 2010, while its total shareholder return (TSR) fell from 47.1 percent to just 6 percent.
“There were some bright spots, however, particularly among banking sectors in emerging markets such as Latin America, Central and Eastern Europe, and the Middle East. On the whole, however, the results suggest that strong performance has become much harder to achieve and sustain in the post-crisis world,” he added.
“This challenge was highlighted by the study’s analysis of return on equity (ROE) and profits. In 2010, the global banking industry doubled its ROE from 4.8 percent to 9.6 percent and increased its profits by more than 130 percent, from $166 billion to $386 billion. But the industry made less profit in 2010 than it did before the crisis, while its equity base has grown significantly. It swelled from $2.6 trillion in 2006 to $4.2 trillion in 2010, an increase of more than 60 percent,” he asserted.
“The competitive dynamics that we envisaged two years ago seem to be taking hold,” said Lars-Uwe Luther, a BCG partner and coauthor of the study. “Business models are being retooled to reflect a more cautious, more highly regulated, and less risk-oriented environment. There is a stronger focus on transaction, processing, and fee-based activities, rather than on complex, high-margin products.
“The environment is bound to remain difficult for some time. In certain markets, banks are still dealing with high levels of toxic assets and underperforming loans, while banks in nearly every country are facing a tremendous amount of regulatory change and uncertainty. Basel III, in particular, seems certain to prolong the pressure on profitability by putting a higher price on risky activities and imposing strong capital and liquidity requirements.”