Following a record showing in 2022, the global banking sector continued to exceed expectations during 2023. Global return on tangible equity reached 13 percent in 2023,1 its highest level since the 2008 financial crisis. Meanwhile, the worldwide Tier 1 ratio hit a ten-year high of 13.4 percent, and net interest margins rose to 2.4 percent, snapping a decade-long contraction.
Despite the remarkable overall performance of global banking, several challenges that appeared in the wake of the COVID-19 pandemic have emerged as important drivers of macroeconomic risk. Rising prices spurred successive rounds of monetary tightening in advanced economies, with the US Federal Reserve (Fed) raising interest rates at its fastest pace since the 1980s. Although US interest rates appear to have peaked, mounting tensions in the Middle East could intensify pressure on global prices. If the pace of disinflation in the United States slows, the Fed may keep interest rates elevated for longer than initially anticipated. While US interest rates were expected to decline in 2024,2 there is no longer consensus on the timing or scope of Fed interventions.
Higher interest rates have boosted bank profits, but a decline in mark-to-market values for bonds and other financial assets has greatly elevated the risks posed by unrealized losses among banks in advanced economies. Mark-to-market losses drove the collapse of Silicon Valley Bank (SVB) in early 2023, and spreading anxiety in global financial markets contributed to the government-mandated takeover of Credit Suisse later that year. High interest rates have contributed to a 10 percent decline in the price-to-book ratio, which is expected to reduce aggregate market capitalization in the global banking sector by $900 billion.3 Amid ongoing macroeconomic headwinds and mounting geopolitical instability, global banking revenue is expected to grow at an average rate of 4 to 5 percent per year during the 2023–27 period.4
In our Global Banking Annual Review 2023,5 we identified four trends that are shaping the evolution of the global financial-services sector and spurring the long-term transformation of the banking industry:
- an uneven macroeconomic outlook marked by higher inflation rates and varying growth trajectories across major economies
- tighter government supervision in response to increased macroeconomic stress and the rise of new technologies and business models
- technological disruption underpinned by advances in digital analytics, process automation, and generative AI (gen AI)
- systemic risk arising from intensifying geopolitical conflict
Moreover, the combined impact of these four trends on the global banking industry is intensifying, reflecting an accelerating process of technological innovation combined with deepening economic interdependence. Surveys conducted by McKinsey’s Strategy & Corporate Finance Practice detail how these and other ongoing developments in the global banking sector are influencing the decisions of bank executives.6
While macroeconomic volatility has increased worldwide, a resilient oil and gas sector has enabled the GCC to outperform other regions
In 2022, the average oil price exceeded $100 per barrel, pushing the GCC’s7 aggregate real GDP growth rate to an estimated 7.3 percent, more than twice the global average. Kuwait exited a two-year recession in 2021, and rising oil prices helped consolidate the recovery in 2022.8 Qatar is the world’s largest exporter of liquefied natural gas, and the increase in natural gas prices caused by Russia’s invasion of Ukraine pushed its GDP growth rate to 4 percent. Meanwhile, GDP growth in the United Arab Emirates hit 7.2 percent, its highest level since 2006.9 By the end of the year, Saudi Arabia was the world’s fastest-growing large economy.10
Oil prices moderated in 2023 but remained well above the break-even point for all GCC countries except Saudi Arabia. Lower oil prices and OPEC production cuts contributed to a decline in the regional growth rate, which fell to an estimated 1.0 to 1.5 percent for the year. However, escalating geopolitical instability has caused global oil futures to rise by 4.0 percent since the fourth quarter of 2023, and aggregate growth in the GCC is expected to rebound to 3.6 percent in 2024.11 Meanwhile, crucial non-oil sectors such as construction, finance, and consumer services continue to expand rapidly, driven in part by the large infrastructure programs and megaprojects currently being implemented across the region. Aggregate investment in these programs is expected to peak around 2030.
Higher US interest rates have boosted bank profits across the GCC
All GCC exchange rates are either directly or indirectly pegged to the US dollar, and regional interest rates thus closely track movements in US rates. As the Fed’s monetary policy drove up financing costs in the GCC during 2023, local and global bank profits soared. Meanwhile, headline inflation remained modest at an estimated 2.6 percent in 2023 and is expected to fall to 2.3 percent in 2024.12
The remarkable performance of GCC banking over the past several years could foster complacency among bank managers and sap their will to implement ambitious transformation agendas. Executives should not assume that the current high-interest-rate environment represents a new normal for bank profitability. If inflationary pressures in the United States continue to ease, the Fed could begin loosening its monetary stance,13 lowering bank profits in the process. Banks that leverage the temporary gains of the present to reduce costs in the future while implementing their transformative agendas are likely to enjoy a significant advantage when interest rates decline.
GCC banks continue to outperform their global peers
The GCC banking sector boasts exceptionally high ROE and some of the largest multiples worldwide. The regional financial sector has yielded healthy returns to shareholders over the past decade, outperforming the global average (Exhibit 1). While the gap has narrowed in recent years, ROE among GCC banks continued to exceed the global average by three to four percentage points during the 2022–23 period (Exhibit 2). Historically low valuations and declining price-to-book ratios still characterize the global banking industry, but GCC banks are creating value by delivering ROE above their cost of equity. Meanwhile, elevated interest rates have pushed banking profits—both in the region and globally—to record highs.
GCC banks have maintained net interest margins that significantly exceed the global banking average (Exhibit 3). The revenue-to-assets ratio for GCC banks is 3.2 percent, well above the global average of 2.3 percent. This gap reflects both the region’s wider net interest margins and its superior net interest income of 2.3 percent compared with a global average of 1.4 percent. While GCC banks have higher average impairment costs than do their global counterparts (0.57 percent of total assets versus 0.31 percent), their operational costs are lower (1.04 percent of total assets versus 1.17 percent). GCC banks are also better capitalized than the global average, which puts downward pressure on ROE. Average ROE among GCC banks is 10.9 percent, significantly higher than the worldwide average of 9.0 percent, but the elevated risk costs and greater capital positions of GCC banks only partially offset the positive impact of their larger margins on ROE.
A positive macroeconomic environment has shielded GCC banks from postpandemic shocks. High hydrocarbon prices, rapid growth, low unemployment rates, favorable demographics, ambitious public investment programs, and moderate inflation have combined to support strong balance sheets and solid margins. GCC banks are more profitable than their peers in developed (and many emerging) markets, and they are still growing rapidly. GCC banks are also funded primarily by domestic deposits, which have proved stable during previous periods of economic stress. Over time, an evolving regulatory environment marked by greater openness, new frameworks for innovation, and measures to improve the ease of doing business will likely create additional opportunities for the sector.
The global banking sector faces long-term risks, but GCC banks have proven resilient to recent shocks
While increasingly dense linkages among far-flung markets continue to offer new opportunities for investment and growth, greater economic connectivity also multiplies the potential sources of instability. The Geopolitical Risk Index spiked in the wake of Russia’s invasion of Ukraine and remains above prepandemic levels, and the data have yet to reflect the adverse impact of the ongoing multidimensional conflict in the Middle East. Meanwhile, growing political fractiousness and polarization across much of the world is contributing to a proliferation of trade barriers, including a dramatic increase in restrictions on investment. Governments are tightening regulatory scrutiny over digital assets, nonbank financial intermediation, and other fast-growing business areas. In parallel, a long-term structural shift in lending demand from manufacturing to services and from established borrowers to start-ups is complicating risk management. All of these trends are occurring against the backdrop of accelerating climate change—a global risk multiplier that also presents a multitrillion-dollar opportunity to finance the transition to low-carbon growth. In a context of mounting uncertainty, the most flexible and resilient banks will be best positioned to thrive.
Global banking faces mounting headwinds over the medium term, but GCC banks are in a strong position to weather future shocks. McKinsey has developed a range of macroeconomic scenarios that provide a basis for projecting trends in bank ROE, both worldwide and within the GCC.14 In all scenarios, the outlook for global banking worsens in later years, and the ROE for GCC banking peaks and declines. However, GCC banks are better positioned to cope with these challenges than are their global counterparts, and the region’s banking indicators will continue to buck global trends.
While our Global Banking Annual Review 2023 emphasizes the downsides of higher interest rates—especially their adverse effects on asset quality and systemic stress15—GCC banking faces unique risks. As high interest rates continue to boost ROE, expanding profit margins could weaken incentives to implement large-scale transformation agendas and lower structural costs. Executives must ensure that short-term gains do not distract focus from long-term strategic objectives. Banks that seize the opportunity to invest surging profits in transformative change and drivers of efficiency will be positioned to outperform their competitors when interest rates ultimately fall (Exhibit 4).
While the current environment is highly favorable, GCC banks are not immune to the long-term challenges caused by changing interest rates
As global monetary policy remains tight, and as financing growth continues to outpace deposits, liquidity management is becoming an increasingly urgent priority. In Saudi Arabia, financing expanded by 14 percent per year between 2019 and 2022, while deposits grew by just 9 percent (Exhibit 5). Mortgage lending is driving the growth of finance despite high interest rates as the government continues to focus on promoting homeownership and establishing a comprehensive residential-finance ecosystem. This is part of a larger regional trend that has seen governments increasingly turn to housing incentives to foster the development of mortgage markets, affecting the retail loan portfolios of GCC banks. The average loan-to-deposit ratio for Saudi banks rose by 18 percentage points between 2020 and 2022—possibly signaling a looming liquidity crunch. Meanwhile, non-interest-bearing liabilities may decline as a share of total bank liabilities while high interest rates prompt changes in household behavior, more corporations embrace cash management, competitive investment offerings increase, and access to savings products expands.
New market players and rapid innovation are shaping an increasingly dynamic competitive landscape
Innovation continues to spur the expansion of the global banking sector, and new technologies will play an important role in transforming GCC banking. Platforms for digital payments and other fintech innovations are driving the uptake of financial services across developing economies and emerging markets, and gen AI appears poised to revolutionize banking and asset management in advanced economies. Worldwide, almost 77 percent of retail customers report that they would increase their use of banking services if new technologies became available. Global customers also show a growing preference for personalized digital services and hybrid offerings, and they are more willing to experiment with new financial products and service providers—highlighting the transformative impact of rising digital literacy on customer behaviors and expectations.
Machine learning algorithms, advanced chatbots, and gen AI applications are creating new avenues for client outreach, powering middle- and back-office efficiency gains, and enabling the creation of new cross-sectional platforms.16 Gen AI is particularly well suited to meet the growing demand for hyper-personalized marketing and fully digital customer journeys. Combined with machine learning and related technologies, the integration of gen AI into bank operations could yield an estimated $300 billion in operational-efficiency gains worldwide.17 Many GCC banks have been swift to adopt new technologies and service models, but the sector’s long-term outlook continues to hinge on how incumbents respond to disruptive forces emerging both from within and outside the banking industry.
Fintechs are intensifying competition across the region. Mirroring an emerging global trend, GCC fintechs are diversifying their services and emphasizing sustainable value creation.18 Many regional fintechs are pivoting from their initial focus on mobile wallets, payment solutions, and other basic offerings to a broader portfolio that includes sophisticated financial products addressing B2C and B2B use cases. Examples of regional fintechs moving beyond digital payments include Saudi buy-now-pay-later provider Tamara, Saudi consumer insurtech platform Rasan, and Emirati working-capital finance solution Lnddo. In addition to payment acceptance and lending for micro-, small-, and medium-size enterprises (MSMEs), GCC fintechs have started offering a range of B2B services.
Robust funding for the regional fintech sector will continue to fuel innovation, while extensive digital penetration and a technologically savvy population will enable high rates of user uptake.19 Fintech services will continue to expand as competition and collaboration between incumbents and digital attackers intensifies.20
Equipped with banking licenses, talent, experience, capital, and data, innovative incumbents are playing offense. Many incumbents are launching greenfield fintechs and neobanks to keep pace with evolving customer preferences and access new market segments. In 2022, Abu Dhabi Commercial Bank (ADCB) launched Al Hilal Digital, a lifestyle digital bank offering family accounts, an e-commerce marketplace, and other “beyond banking” features. Al Rajhi Bank, one of Saudi Arabia’s largest incumbents, founded Emkan, a microfinance platform for Saudi nationals. In 2021, Kuwait-based Boubyan Bank launched Nomo, one of the world’s first Islamic digital banks, which has since been joined by Ruya, the first international Islamic digital bank in the United Arab Emirates.
Digital technologies are also offering new opportunities to reach MSMEs and foreign workers, two of the region’s most underserved market segments. In March 2023, Saudi Arabia’s Alinma Bank announced a partnership with Dubai-based start-up Qashio. Alinma will now offer Qashio’s spend-management platform to its corporate and MSME customers, enabling businesses to issue virtual and physical corporate cards for their employees with embedded features for spending control, accounting integration, and workflow management. Equipped with a banking license from First Abu Dhabi Bank (FAB) and financing from leading corporate houses and the Abu Dhabi Developmental Holding Company, Wio has emerged as the United Arab Emirates’ first stand-alone digital-banking platform.
Nonfinancial market players, including telecommunications companies and large retailers, are targeting new revenue streams by offering digital wallets, payment platforms, and remittance services for unbanked and underbanked consumers. In Saudi Arabia, STC Pay offers multiple person-to-merchant and merchant-to-merchant payment systems, as well as domestic and international remittance transfers, a payroll-management platform, online marketplace services, and digital and physical credit cards provided by its partner, Visa. Majid Al Futtaim, a Dubai-based retail and entertainment firm, has developed SHAREPay, a digital wallet that combines loyalty rewards, payment services, and buy-now-pay-later offers. As nonfinancial players continue to integrate digital technologies into their business models, banks have opportunities to form partnerships that extend their reach beyond the current definition of financial services. The banks that are best able to leverage these new opportunities will have the greatest capacity for long-term growth and profitability.
GCC regulators are developing open-banking frameworks to promote innovation, expand access to financial services, and strengthen competition
Regulators are enabling innovation in markets across the GCC. Bahrain and Saudi Arabia have implemented frameworks for open banking that align with international standards.21 While the presence of foreign firms remains limited, the entry of innovative domestic start-ups is spurring the uptake of new technologies and business models among incumbents, increasing competition while also creating opportunities for collaboration and unlocking new sources of value. Multiple fintechs are pioneering novel open-banking use cases, and start-ups are proliferating. Lean Technologies in Saudi Arabia and Tarabut Gateway in the United Arab Emirates now offer the seamless integration of banking, fintech, and merchant systems, with application programming interfaces (APIs) supporting permissioned data-sharing on behalf of customers. Open banking will accelerate customer churn, decrease margins, and boost IT costs, further intensifying competition and putting pressure on banking profits. Up to 30 percent of gross banking profit may be under threat, but that figure is offset by emerging opportunities arising from increased customer penetration, new services, lower default risks on lending products, reduced operational costs, and collaboration with new entrants and nonfinancial market players. Banks that successfully adapt to the changes brought about by open banking will be able to capture upside while limiting threats to profitability.
The road ahead for GCC banks
While GCC banks are well positioned to manage downside risks to the global outlook, they cannot afford to be complacent. The following priorities should be on the agenda of every banking CEO in the region.
1. Manage uncertainty around interest rates
In the short to medium term, growing their liabilities and attracting retail customer deposits can help GCC banks alleviate liquidity pressures and access a cheaper source of funds. Effective oversight and risk-mitigation mechanisms will be crucial to ensure the prudent evolution of liabilities and to manage an increase in the share of customers with little or no credit history. Launching targeted securitization programs can help free up bank balance sheets and ease pressure on loan-to-deposit ratios, enabling banks to allocate capital and funding to support further growth.
High interest rates have bolstered the revenues, margins, and capital positions of GCC banks, but strong internal safeguards will be crucial to manage interest-rate risk. Rate increases have lifted net interest margins, as consumer finance and other short-term lending products have been repriced faster than liabilities. Although the prospect has become less likely, a further increase in interest rates could present challenges for GCC banks. As the collapse of SVB illustrated in 2023, rapid interest rate hikes can erode the value of securities portfolios, leading to the sudden loss of customer and counterparty confidence.
In an uncertain interest rate environment, GCC banks can build resilience by focusing on the health of their balance sheets. Stronger asset-liabilities management should be complemented by stress tests that include scenarios in which interest rates remain higher for longer. Depositors’ responses to persistently elevated interest rates could pose a particular risk to GCC lenders that are highly exposed to mortgages and other long-term fixed-rate assets. Emirati and Saudi bank funding is characterized by a large percentage of nonmaturity demand and savings deposits (CASA), with shares reaching 44 percent in the United Arab Emirates and 57 percent in Saudi Arabia. Historically, these deposits have proved highly sticky, and a recent stress-test analysis estimates that if they were to become outflows in the three-month liquidity bucket, the cumulative funding gap would turn negative for all banks.22
2. Increase operating efficiency
Despite the operational sophistication of GCC banking, many back-end processes are still performed manually and subject to cumbersome procedural requirements. Digitalizing these processes and automating routine tasks will allow banks to use their human resources more efficiently. Gen AI and machine learning applications can automate an expanding range of complex back-office processes, sharply reducing operational costs.
Investments in efficiency gains could target the following:
- Back-end automation. Banks are increasingly automating their back-end operations to minimize human intervention, thereby lowering both costs and error rates.
- Procurement spend optimization. Banks are continually optimizing their external spend, annually revisiting the validity of their spend base, and setting aggressive cost optimization and cost avoidance targets. Banks are also leveraging traditional AI to further improve the deployment of resources, including cash management, ATM footprint, point-of-sale allocations, and the allocation of software development resources.
- Banking utilities. Domestic and cross-border banking utilities can create value for GCC banks, either by optimizing their cost base or by providing innovative solutions. In addition to managing costs, banking utilities can pool resources, expertise, and capabilities to support the development of new client offerings.
3. Transform the customer experience
Customer needs are rapidly evolving. The median age of the GCC population is just 32, the region’s mobile and internet penetration rates are among the highest in the world, and most GCC governments are pursuing aggressive digitization agendas. Consumers are hyperconnected and highly informed about competing offers and services, with limited loyalty to traditional players. Critical retail segments increasingly demand products that are individually tailored and targeted in real time. Wealth management for affluent customers, flexible card offerings, and savings accounts for students and other young people are all rapidly growing business lines, and regional authorities are developing regulations for banking as a service (BaaS) and open banking that will further intensify competition in the retail segment. To maintain customer trust while continuing to innovate, banks can strengthen their digital marketing efforts, proactively manage customer satisfaction, and use traditional AI and gen AI for preventive churn and enhanced customer experience.
Banks that meet the high expectations of young, technologically savvy GCC consumers could enjoy a major competitive advantage over their rivals. McKinsey’s research on the Saudi banking sector shows that the TSR of banks rated as leaders in customer experience exceeded the TSR of banks with lower levels of customer satisfaction by about 116 percent at the end of 2022. This finding is consistent with the results of McKinsey’s customer experience survey, which establishes a clear correlation between positive customer experience and higher cross-sell and retention rates.23
GCC banks are fully digitalizing their customer journeys, from initial touchpoint to successful fulfillment. Multiple banks in the United Arab Emirates and Saudi Arabia are fully reimagining both their retail journeys (such as onboarding, personal loans, credit cards, and home financing) and their corporate journeys (such as MSME and midsize corporate onboarding and credit renewals). In addition to revamping customer journeys, GCC banks can leverage gen AI and other cutting-edge technologies to reduce the number of service interactions at assisted channels by enhancing customer self-service and automating issue resolution.
Digital banks and fintechs are changing the GCC’s retail banking landscape by presenting consumers with innovative, customized products at a low operational cost, while stand-alone customized digital offerings focused on specific market segments are increasingly available. For traditional banks, migrating a wider range of offerings to digital platforms—including remote advisory services and automated sales and transactions—can help improve customer outreach while managing costs.
In parallel, expanding digital partnerships can enable customers to access new marketplaces for adjacent products worldwide. Firms offering insurance, automotive sales, real estate, luxury goods, and even food delivery are becoming more tightly integrated with banking apps, offering greater customer convenience as well as new opportunities for synergistic product targeting. Universal banks increasingly offer one-stop shops for customer service, with each branch acting as a single node in an omnichannel system for engaging customers through a unique walk-in experience. Operationalizing these “smart branches” requires reskilling the workforce at scale while creating and staffing new roles such as universal customer agent.
4. Stay focused on ESG
The continued growth of environmental, social, and governance (ESG) investing offers critical opportunities for banks to accelerate the decarbonization of economic activity in the GCC. Regional governments have integrated emissions-reduction targets into their development plans and committed resources to an expansive array of environmental and climate goals.24 Meanwhile, many of the region’s core corporate entities continue to pivot toward sustainability. GCC banks are supporting public and private decarbonization initiatives by financing the investments needed to achieve net-zero targets (Exhibit 6). Across the region, financing the transition of carbon-intensive “gray industries” offers the greatest opportunities for high-impact ESG investing, though advancing the global effort to combat climate change remains its primary rationale.
GCC banks have started broadening their ESG targets to include sustainable-finance volumes and emissions reduction, and a growing number of banks now participate in ESG-related capital-market transactions. At COP28, the UN’s 2023 Conference of the Parties, the Central Bank of the United Arab Emirates announced its intention to mobilize more than $270 billion in sustainable financing from the Emirati financial sector. FAB, the United Arab Emirates’ largest financial institution and a member of the Net-Zero Banking Alliance since 2021, has already committed to allocating more than $135 billion to green investments by 2030, which would meet about half the Central Bank’s goal while boosting FAB investments in sustainability and transition financing by up to 80 percent.25
To keep pace with the efforts of their global peers, GCC banks will need to invest more resources in developing in-house capabilities to identify, evaluate, and seize ESG opportunities. In the near term, extending ESG offerings in debt lending—including project finance, bonds, syndicated loans, and ESG advisory services—will help GCC banks build relationships with corporations and government agencies at the forefront of decarbonization. However, banks should continue to recognize ESG engagement as a hallmark of highly successful financial institutions and a crucial element in the fight against climate change, but not necessarily as an independent driver of value creation.
5. Create shareholder value through M&A and restructuring
Historically, M&A transactions have delivered higher returns during periods of weak economic activity. The principal rationale for consolidation is shifting from a narrow focus on achieving cost synergies to creating new opportunities for growth, revenue generation, and expansion into new markets. Consolidation can help the region’s banks scale to support GCC governments’ ambitious economic agendas while also gaining investment power, enhancing their ability to attract deposits, and boosting net interest income. Notable examples include the establishment of the Saudi National Bank in 2021 via a $15 billion merger agreement between National Commercial Bank and Samba Financial Group; the acquisition of Bahrain’s Ahli United Bank by Kuwait Finance House, which created the GCC’s seventh-largest bank, with more than $100 billion in assets; and the 2019 merger of ADCB, Union National Bank, and Al Hilal Bank, which positioned ADCB to post $40 billion in asset growth and generate 26 percent in total shareholder returns over the past three years alone, according to McKinsey analysis.
Acquiring small fintechs and leveraging significant corrections in the valuations of publicly traded fintechs can allow banks to build scale, access niche capabilities, and capture new growth opportunities in BaaS and other emerging areas. The integrations space is already seeing increased activity, including traditional M&A as well as joint ventures and alliances, offering banks considerable scope to increase cost efficiency while limiting the risks involved in traditional M&A.
GCC banks can also take advantage of shifting market dynamics by carving out ancillary operations to free up capital, divest undervalued units, and refocus on core business. ADCB transferred its $1.1 billion nonperforming loan (NPL) portfolio to investment funds advised by Davidson Kempner Capital Management—the first sale of a significant NPL portfolio by the bank and likely the largest such transaction ever undertaken in the United Arab Emirates.26 Several major regional banks have successfully sold payment providers at high multiples as part of a broader shift toward unbundling utility and customer-facing banking functions. FAB carved out its payments business into a fully owned subsidiary, Magnati, creating a more focused and agile entity with regional ambitions based on a differentiated proposition.27 By preparing to spin off more elements of their traditional operations into stand-alone businesses, GCC banks can take advantage of favorable market conditions and accelerate the implementation of their transformation agendas.
6. Transform business and operating models to compete in the digital world
GCC banks can continue to diversify their revenue sources by leveraging the opportunities offered by open banking and embedded finance. To keep pace with a rapidly evolving field, GCC banks will need to realign their operating models to better resemble those of technology companies. Top priorities could include transitioning from functional silos to cross-functional, purpose-built teams with clear lines of accountability; introducing a transparent cascade of top-team strategy down to concrete backlogs of teams; replacing waterfall project planning with product-based prioritization and funding; cultivating strong engineering practices; and establishing a culture of professional excellence and healthy risk-taking. Banks that successfully embrace this way of working will be able to rapidly improve customer experience, increase employee engagement, reduce time to market, and boost efficiency by as much as 30 percent.
Investing in gen AI and related technologies can help GCC banks generate deeper insights and build more sophisticated capabilities. While banks must remain mindful of the need to manage the risks associated with emerging technologies, the latest generation of AI models offers unique opportunities in a variety of areas, including:
- Granular customer segmentation. Machine learning algorithms can analyze customers’ financial behavior and characteristics to market tailored products to distinct segments, leading to higher customer satisfaction and loyalty.
- Streamlining loan underwriting. AI can also be used to assess creditworthiness and make quicker, better-informed underwriting decisions. By drawing from a wide range of data sources, machine learning algorithms can better forecast default probabilities and assess customers’ risk profiles, enabling banks to extend financing to MSMEs and other underserved segments.
- Optimizing marketing and sales efforts. Banks can use traditional AI to measure the effectiveness of their marketing campaigns, and they can leverage machine learning to generate leads and increase sales efficiency. By tracking customer behavior and outreach response, banks can optimize their marketing strategies to achieve higher returns on their marketing investments.
7. Modernize core technologies beyond digitization
To maintain their competitive edge in an increasingly integrated global financial marketplace, many GCC banks may need to revolutionize their systems. Implementing customer-centric, state-of-the-art tech stacks grounded in data analytics can enable banks to offer customized products and services while shortening integration times and reducing deployment effort. A well-designed tech stack must be lean and scalable as the bank grows. To guard against the endemic risks of digitalization, banks must embed the highest global standards for cybersecurity within all organizational, process, and technical activities. Cybersecurity protocols should reflect best-in-class methods, such as using procurement power for zero-trust architecture, distributed denial-of-service protection, tokenization, two-factor authentication, and biometric identification.
Cloud platforms alone represent a $5 billion to $9 billion opportunity for the Middle East financial sector.28 Most of this value will come from three areas: business optimization, enhanced resilience, and IT efficiency; faster innovation and increased capabilities; and the creation of cloud-enabled products and services. New cloud-based operating models can increase speed and agility while offering efficient scalability.
Banks can leverage public cloud services to transform their legacy banking infrastructure and launch innovative, cloud-native apps. However, expanding beyond the pilot stage requires treating cloud adoption as an integrated transformation with a business case based on enhanced revenues and reduced operational costs rather than unit-cost IT efficiency alone. Global banks that have embraced this approach have started to capture value at scale. Cloud-service providers are increasing their presence in the Middle East thanks to surging local demand, reduced barriers to collaboration, and the availability of critical technology enablers. Moreover, the local presence of global companies has accelerated compliance with financial regulations on data sovereignty. GCC banks must establish a sustainable funding model for cloud investments and financial operations to keep costs transparent and under control. Because cloud-based operations are a completely new working environment, banks will need to attract new talent while reskilling existing staff.
The GCC banking sector is poised for continued growth.
Underpinned by strong domestic economies, favorable demographics, and supportive government agendas and regulatory frameworks, GCC banks are well positioned for continued expansion and diversification. While the global macroeconomic landscape remains uncertain, we believe GCC banks will emerge stronger if they continue to invest in the capabilities of the future while also building resilience against medium- and long-term risks.
