Middle Eastern banks have demonstrated superior profitability and efficiency compared to their global peers, according to senior officials from a leading global consultancy.
Speaking at the Banking, Innovation, and Technology conference organized by Khaleej Times, Sheinal Jayantilal, a partner at McKinsey & Company, highlighted that the global banking sector generated a record $1.15 trillion in profits in 2023, significantly outpacing the energy sector, which ranks second.
Jayantilal emphasized that while the scale of the banking industry's profitability is substantial, the key metric is the return on equity relative to the cost of equity. From 2010 to the present, the industry has only managed to exceed the cost of equity in three out of the past 13 years, primarily during periods of soaring interest rates.
Despite the impressive $1.15 trillion in profits, the historical inability of banks to consistently deliver returns above the cost of equity has led to a global price-to-book ratio of 0.9 for banks, compared to 2.8 for other industries. This indicates a market perception of banks as undervalued.
On a positive note, Jayantilal pointed out that Middle Eastern banks have consistently covered the cost of equity over the past 13 years, showcasing superior profitability and efficiency. The total shareholder return for GCC banks has notably outperformed the global banking industry, signaling a more optimistic outlook for the region.
Jayantilal also noted that Middle Eastern banks are leading in digital penetration, surpassing Europe in mobile activity, servicing capabilities, and digital sales penetration. With interest rates expected to decline, financial institutions face challenges in growing liabilities, attracting retail deposits, and enhancing efficiency through technology.
Sagar Shah, an associate partner at McKinsey & Company, discussed the FinTech sector, noting a similar trend of pressure despite regional hotspots. Global FinTech funding peaked in 2021 during the Covid-19 pandemic but has since normalized to pre-Covid levels, with a 67% drop from the 2021 peak. Despite this, the industry remains robust with $350 billion allocated to FinTech, and the Middle East is home to three of the 300 global FinTech unicorns.
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