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Inflation risks, ESG to impact GCC banks’ corporate and investment banking business: Report

28 Nov 2022 By GULAM ALI KHAN

The GCC banks’ corporate and investment banking (CIB) business will be critically exposed to the global inflationary pressure and heavily impacted by environmental, social and governance (ESG) efforts, a new report said on Tuesday.

Corporate banking assets in the GCC region represent more than three times those of retail banking, according to global management consulting firm Arthur D. Little.

GCC banks, however, focus their external communication primarily on the consumer segment, whether it is Fintech, strategy, digital transformation, products, or applications. Corporate banking is often perceived as a specialist area and, as a result, innovation is frequently thought to be focused in the retail banking sector, Arthur D. Little said in its new Viewpoint “Pursuing Excellence in Corporate Banking”.

The report reviews the impacts of recent and expected disruptions and explores options for GCC banks to strengthen and grow their CIB business. It highlighted that there are a few important reasons for banks’ primary focus to return to corporate banking, namely inflationary pressure, ESG efforts and potential growth drivers for CIB business.

“An inflationary storm is ahead, and CIB will be critically exposed to it. Capital and debt are now rare resources and banks need to monitor their adequacy ratios and optimise allocation based on diversification, return, and risk targets. Banks must also anticipate potential balance sheet clean up and impact on tier-1 capital, and also consider developing treasury and liquidity management capabilities in parallel,” the report said.

The Arthur D. Little report noted that CIB is heavily impacted by ESG efforts. It said ESG represents a new dimension by which investors judge banks, so banks must allocate resources to ESG to improve their performance versus the competition.

Highlighting opportunity for CIB, the report said that the GCC banks’ corporate and investment banking business offers a significant upside potential.

“While the retail segment is closer to reaching saturation, CIB benefits from several growth drivers. Clients are facing increasingly complex issues that require new solutions from banks. In addition, the SME segment remains underpenetrated. The potential of digital optimisation remains mostly untapped as well, and sizeable innovation opportunities exist in the space of blockchain and cryptocurrencies,” the report said.

The Arthur D. Little report also outlined an increasingly competitive, fast-evolving, and complex environment for GCC banks’ CIB business, which includes a variety of challenges caused by structural trends, COVID-19 pandemic, and the war in Ukraine.

“Structural trends include a continuous decrease of margins followed by rebounding inflationary rates. There is also increasing competition for larger clients, calling for segment and product diversification,” the report said.

The COVID-19 pandemic, as per the report, has also created many challenges for banks, including volumes growth that is hampered by demand contraction. It said the war in Ukraine has added to volatility in stocks, commodities, and currencies, implying additional trading volumes and hedging needs.

Philippe DeBacker, managing partner and global head of financial services, Arthur D. Little, said,“The GCC region offers a positive and transformational environment for corporate and investment banking amid high hopes for the economy and enormous private and public sector spending. Banks should anticipate further sector consolidation due to shrinking margins and high regulatory requirements.”

“To accelerate their journey to becoming banks of the future, GCC banks need to redesign their business models to maximise revenue per customer, protect capital and ensure risk resilience by optimising the use of financial technology,” he added.

New opportunities

The Arthur D. Little report noted that customers are expecting full support from banks despite dire circumstances. It said GCC banks have the opportunity to engage businesses beyond credit, such as with distressed M&As, debt capital market, or ESG transformation financing.

The report further said that the banks should simplify business by reducing the complexity of the organisation as well as the products and activities they carry out.

“Reducing their share of fixed costs requires the use of digital tools to optimise, automatise, and/or outsource part of the value chain, either to suppliers or to shared utilities,” the report added.

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