Net profits of Mena banks surge 30% in first half of 2023 on strong fundamentals

Growth was driven by technological advancements, strong fiscal condition and government investments, EY says

The investment of Dh131 billion in technology initiatives by the UAE banking industry has played a key role in attracting digitally savvy customers. Khushnum Bhandari / The National

Banks in the Middle East and North Africa region experienced about a 30 per cent annual jump in net profits and a 12.2 per cent increase in net assets in the first half of 2023, according to a new report by EY.

The year-on-year returns on equity recorded a surge of 6.18 per cent, and the net interest margin grew by 0.2 per cent during the January-June period.

The growth was primarily driven by technological advancements, strong fiscal conditions, government investments, a positive outlook for oil and gas prices and an expected improvement in the global economic landscape, the consultancy said in its Mena H1 2023 banking report.

EY, which did not disclose the exact growth figures in its report, said the future outlook for the banking sector in the region is further strengthened by strong oil and gas prices and a significant boost in non-oil activity. This growth will also bolster the credit demand in the region, it added.

Last week, Opec stuck to its forecast for oil demand growth for 2023 and 2024 and said it expected the global economy to grow at a faster pace this year. World oil demand will rise by 2.25 million bpd in 2024, compared with growth of 2.44 million bpd this year, the group said in its monthly oil market report.

“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,” Charlie Alexander, EY Mena financial services leader, said.

“This development is playing an increasingly important role in the region’s overall economic growth amid ongoing economic diversification drives,” Mr Alexander said.

Mena banks also witnessed an 18.8 per cent growth in operating income in the first half of the year. Total deposits have increased by 6.08 per cent, and the loan-to-deposit ratio is up by 5.43 per cent.

Non-performing loans are expected to remain at the current levels in 2023, with banks adopting a selective approach to lending, EY said.

Regulatory oversight will be in the spotlight this year with a heightened focus on battling financial crime, electronic know-your-customer processes, anti-money laundering and cybersecurity.

The industry can also expect further acceleration of financial market infrastructure initiatives such as eKYC platforms and open banking initiatives across the region, the report predicted.

“In recent years, Mena regulators have accelerated the pace of their economies’ integration with the rest of the world, including reforming existing laws and infrastructure.

“Mena companies and investors, especially those based in the GCC region, are ramping up acquisitions and investments,” the report said.

Digital banking solutions are also on the rise to meet evolving consumer needs in the region. Artificial intelligence is reshaping the financial services industry, bringing faster and more personalised banking services through chatbots.

“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,” Houssam Itani, EY Mena banking and capital markets leader said.

“Central banks are strengthening their core roles and are implementing new technologies … 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 eKYC platforms, real-time payment systems, central API Infrastructure and many others.”

Digital banking, mobile payments, open banking, tokenisation, digital currencies, blockchain and sustainable finance are some of the other priority areas of the regional banks.

They are also developing new customer experience initiatives aimed at shifting competition away from products to lifestyle banking. This includes introducing chatbots and loyalty programmes, in addition to leveraging the latest customer analytics tools to improve their offerings, EY said.

Another positive trend fuelling the growth of the banking sector in the region is the pursuit of net-zero road maps by most GCC countries. It has led to a rise in the demand for sustainable finance, a key enabler of the transition to clean energy.