MENA banking sector witnesses 30% surge in net profits, 12.2% increase in net assets year on year in H1 2023

According to the EY MENA H1 2023 Banking Report, the region experienced a remarkable year on year (YoY) growth with a 30% surge in net profits and a 12.2% increase in net assets. Meanwhile, YoY returns on equity recorded a rise of 6.18%, and the net interest margin grew by 0.2%.

This robust performance extended to the region's banks, which witnessed an 18.8% growth in operating income. Total deposits have increased by 6.08%, and the loan-to-deposit ratio (LDR) is up by 5.43%.

Non-performing loans (NPLs) are expected to remain at the current levels in 2023, with banks adopting a selective approach to lending. Regulatory oversight will be in the spotlight this year with the ongoing implementation of Basel IV regulations and a heightened focus on battling financial crime, electronic know your customer (eKYC) processes, anti-money laundering (AML) and cybersecurity. The industry can also expect further acceleration of financial market infrastructure initiatives such as EKYC platforms and open banking initiatives across the GCC to continue.

Charlie Alexander, EY MENA Financial Services Leader, says:

“With limited effect to the ongoing banking industry crisis in the US and Europe, the GCC banking sector has undergone a fundamental transformation and is now pursuing a strong upward trajectory, boosted by an increasing demand for lending. This development is playing an increasingly important role in the region’s overall economic growth amidst ongoing economic diversification drives. Another positive trend is the pursuit of net-zero roadmaps by most GCC countries, which has led to a rise in the demand for sustainable finance, a key enabler of the transition to clean energy.”

The outlook for the region has been strengthened by robust oil and gas prices and a major boost in non-oil activity, which has also supported credit demand. Other prominent trends dominating the banking sector include robust fiscal condition, government investments, an anticipated improvement in the global economic landscape and technological advancements.

Digital banking solutions on the rise to meet evolving consumer needs

Digital transformation is the future of the MENA banking sector. Artificial intelligence (AI) is reshaping the financial services industry in the region, bringing faster and more personalized banking services through chatbots. Among other priority areas are digital banking, mobile payments, open banking, tokenization, digital currencies, blockchain and sustainable finance. Banks are also developing new customer experience initiatives aimed at shifting competition away from products to lifestyle banking. This includes introducing chatbots and loyalty programs, in addition to leveraging the latest customer analytics tools to improve their offerings.

MENA banks are increasingly investing in digital banking solutions to address the ever-evolving needs of their customers while balancing customer experience and risk management. By strengthening their risk management technologies and systems, banks are boosting their ability to withstand potential financial risks and comply with regulatory requirements. 

Meanwhile, front-to-back modernization, cloud migration and robotic process automation can help banks establish connections between customer-facing operations and back-end servicing, minimizing inefficiencies.

Houssam Itani, EY MENA Banking & Capital Markets Leader, says:

“Over the past six months, we have seen an accelerated adoption of growth of digital transformation and implementation of robust risk management practices in the region, which should not be forgotten in the frenzy of growth. Financial institutions are also increasing their transparency and disclosure of environmental and social risks and impacts. We are also witnessing an evolution of the role of banking regulators. Central banks are strengthening their core roles and are implementing new technologies to enable it. Furthermore, they are embracing a wider role of enabling banking innovation through implementing regulatory frameworks which are conducive to FinTech and Open Banking and financial market infrastructure such as E-KYC platforms, Real Time Payment Systems, Central API Infrastructure and many others. The evolving regulatory environment is expected to open the door for measured growth which balances innovation and financial resilience.”

Growth of the Saudi banking sector driven by Vision 2030

The Kingdom of Saudi Arabia (KSA) is accelerating its economic transformation in line with its ambitious Vision 2030, proceeding at speed with the development of a number of mega-projects and modernization initiatives. This has reflected positively on the country’s banking sector. According to the 2022 financial results, net profit increased by 28% when compared to 2021 with a total asset growth of 11.5%. Meanwhile, loan volumes reached a 9.6% compound annual growth rate (CAGR), while deposits increased by 6.8%, leading to a loan-to-deposit ratio (LDR) surge from 77% to 101%. On January 1, 2023, Saudi banks commenced the official implementation of Basel III final reforms as per Saudi Central Bank (SAMA) directives. 

The study predicts that GCC banks will remain resilient in 2023. Economic conditions are poised to improve as the oil price is projected to sustain and enable governments to support the economy. Meanwhile, inflation is likely to subside due to higher interest rates.

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