Gearing up to competition

As the realities of WTO membership begin to set in, local banks in the Middle East are no longer thinking about native markets and healthy profits but are thinking beyond the box in a global fashion

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By  Massoud Derhally Published  July 25, 2002

|~||~||~|Middle Eastern banks are vigorously wooing customers by offering a range of personal banking services. On both the demand and the supply sides of the equation, the conditions of competition are changing. The region’s customers, be they retail or corporate, are becoming increasingly sophisticated, or as some industry analysts point out, fickle, exhibiting little loyalty if a competitor offers more than their existing bank.

The market is over-crowded by undersized institutions that either lack the resources to provide cutting edge services, or just simply don’t care as long as they continue to post healthy profits. That said though, it is correct to mention that the majority of financial institutions have reacted positively to the challenge, and are able today to compete successfully within their own markets and the region at large.

But even so, more will need to happen with the advent of WTO membership, as institutions realise that they have to conform to a new playing field, in increasingly cut throat markets. The need to consolidate and diversify services are raised over and over again by industry insiders as perquisites to moving the local banking sector forward. While there have been only marginal consolidation moves in the banking industry, local banks have certainly exerted an effort in gearing up to competition. They are doing it either on the retail side where their comparative advantage lies, by embracing the internet to offer web based banking services, and expanding into wealth management services, or by offering Islamic services through separate Islamic branches.

Retail banking is important and most banks are building up retail activities due to the higher margins available in this area, as well as the good growth prospects, according to Darren Stubing, chief banking analyst at Capital Intelligence. “To remain competitive, local banks must also innovate and provide leading edge products and focus closely on their customer base,” says Stubing.

However, Stubing also adds that, “not all banks will survive going forward as many of the markets remain overbanked. Consolidation is expected and economies of scale, as well as resources, are important and many of the smaller banks do not have this. To survive, the small and medium banks will have to focus on niche market areas where they can provide value.”
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In Dubai, the heavy presence of international players like HSBC, Citibank, and ABN AMRO, has upped the ante in terms of innovation and quality of services, but local banks are fairing well. National Bank of Abu Dhabi (NBAD), the UAE’s largest bank, believes that the increased competition generated by international banks is good and is forcing all banks to reconsider their own approach to service and quality. “The market may be overcrowded,” says Khamis Buharoon, head of the domestic banking division, “but size isn’t the driving factor.”
“NBAD has been extremely proactive in this regard and as a large national bank we have a big advantage in terms of distribution: we have the largest branch network and largest ATM network in the UAE,” says Buharoon. NBAD, though, has not relied on its number of branches or ATMs and has invested heavily in call centre technology and in an interactive web site.

National Bank of Dubai (NBD) says the primary advantage of local banks in the UAE is in being able to have many branches and representation points to service their target customers.
From a retail point of view, NBD says its strategies are reflective of its perception of customer needs and the opportunities in the market.

“National Bank of Abu Dhabi is attempting to build the requisite experience necessary to win mandates in the area of project finance, which has traditionally been the preserve of foreign banks,” says Krishnan R., a director at the international ratings agency Fitch IBCA.

“Given our exhaustive branch network our bank intends to fully capitalise on this by upgrading service quality and developing conventional/non-conventional delivery channels to optimise the balance in bricks and mortar. On the whole, it would be right to assume that there is more money in the retail business and any bank with suitable risk monitoring and containment processes would find it worthwhile to focus on it,” said a spokesperson for NBD.

Emirates Bank International, which is one of the biggest local banks in the UAE is investing heavily in alternative delivery channels and looking closely at the retail segment in banking. “A lot the banks have taken an increased retail focus because that’s where the money is these days. You have much greater spreads; there is a much larger target market to go after than the corporates and if done correctly you can make a lot of money,” says Lou Scotto, general manager of retail banking at Emirates Bank.

“Retail banking is kind of commoditised; everyone has savings accounts and fixed deposits, they now have accounts where you put your money in and when you get a draw you can win millions. Credit cards themselves are also commoditised and only recently have banks started to become smart about having value ads on their cards that make theirs stand out in the crowd.”
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Emirates Bank is trying to leverage the self-service technology of its ME Bank to drive down costs. The technology of ME Bank, according to Scotto, allows for multiple channel access to the bank from a customer’s home, mobile phone, or anywhere in the world. “It’s proven to be quite successful. Our account-opening rates are starting to have an impact, where I think the competition is getting a little concerned,” says Scotto. “They have not all jumped on the bandwagon, because a lot of them don’t have the courage to do what we have done. We are going to go out with smaller units: 30 locations will have the same selling power and perform like a full service branch.”
Dubai is absolutely the most intense market in terms of competition.

Banks like HSBC, Citibank, and Standard Chartered have the luxury in supporting a small branch network. But the foreign banks, according to Scotto, tend to cherry pick the high value products. “They go after the credit cards and the loans and if they don’t have a transaction account with them they send them to us,” says Scotto. “The multinational banks’ philosophy towards risk is different than local banks. Retail credit is a portfolio business. You have a portfolio; delinquencies are within a well-accepted level, let’s just keep on bringing in new business. Emirates Bank is finally getting away from looking at retail credit like corporate credit because that is a very manual labour intensive way to manage a business.”

National Bank of Kuwait, regarded as the largest and most successful commercial bank in Kuwait, is considered one of the better-run regional banks, despite the absence of any foreign bank in Kuwait.
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But even in the presence of foreign competition, NBK would still fare quite well because it has a commanding market share in Kuwait. “We have been pursuing a customer-focused strategy for over five years,” says Adel Al Majed, general manager of the consumer-banking group at NBK. “This strategy ensures that all our activities revolve around the customer, meaning our channels, products, systems, communication and culture are aligned to customer needs. Our strategy, while focusing on the key strategic segments in Kuwait, also ensures that NBK is differentiated, which is achieved by pursuing customer loyalty, service quality, and community image programmes.”

NBK has a healthy mix of customers reflecting the various segments of the population in Kuwait. The bank currently has 40% of the bankable population in Kuwait, according to Al Majed. If a foreign bank does come into the Kuwaiti market, it will need to invest an enormous amount of time and resources to build up a franchise equal to NBK’s.

“NBK also has one very specific advantage over all other banks; they have the unique experience of having run their operations successfully from London despite the Iraq invasion of Kuwait in 1990. However, if NBK were to open a branch in an over banked and competitive market, like the UAE, it would have to invest an enormous amount of resources with no certainty of commensurate returns,” says Fitch’s Krishnan. While nothing has happened as of yet, there is also much talk today about NBK acquiring banks in Egypt, and branching into other markets.

In Saudi Arabia, banking is a different ball game all together. That is largely because of the joint ventures between foreign and local banks. Even so, the banking sector is quite well developed, and 100% local banks are not far behind the joint venture entities.
“Riyadh Bank was a slow starter, but today it is catching up pretty fast. They are offering a similar level of service and range of products as the foreign banks. National Commercial Bank (NCB), another local bank, has revamped its branch network and overall set-up in terms of products and offering exactly what joint venture banks are,” says Krishnan.

Brad Bourland, chief economist at Saudi American Bank (SAMBA), says that being seen as a local brand and not a foreign entity in the local marketplace is a strong advantage of local banks. “Customers know we are here for the long haul and through all market conditions,” he says. “Given the extensive branch and ATM networks of the domestic banks in Saudi Arabia, the barriers to entry for foreign competitors are high and costly in many areas of the banking business, especially retail banking.”

There is no doubt that the market is demanding more of a product variety that caters to specific needs and that it is requiring higher levels of service. Barriers will slowly come down between the GCC markets and the larger, leading banks in the region will expand across boundaries, according to Capital Intelligence’s Stubing.
“Cross border representation is already beginning to happen and is a must for earnings expansion on a meaningful scale over the longer term,” says Stubing. — Massoud A. Derhally
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