February 13, 2011

Middle East Region Requires Successful Growth Strategies after the Perfect Storm

Individual liquid wealth in the region estimated at between $1 trillion and $1.2 trillion, with Saudi Arabia and the United Arab Emirates as the largest wealth markets with $500 billion to $550 billion and $260 billion to $280 billion respectively.

There is tremendous individual wealth in the Middle East region, particularly the six countries of the Gulf Cooperation Council (GCC), that will continue to grow in the years to come. And thanks to the financial crisis, which undercut confidence in many established private banking relationships, a significant part of this private banking business is up for grabs, revealed a recent report by Booz & Company. “We estimate the total liquid wealth in the region to be between $1 trillion and $1.2 trillion, with most of that wealth in the hands of local families. By market size, Saudi Arabia and the United Arab Emirates are the largest wealth markets, with $500 billion to $550 billion and $260 billion to $280 billion, respectively,” said Peter Vayanos, partner at Booz & Company. To shape their wealth offerings appropriately and succeed, private bankers must understand how the financial crisis has altered investor behavior—at least temporarily but perhaps permanently, the report concluded.

Private Banking in The GCC: Opportunities and Characteristics

Private bankers have spent two years coping with one of the most difficult periods in modern financial history. “A global “perfect storm” of asset-price declines and the near or actual collapse of well-known financial institutions and even sovereigns have altered the private banking landscape and the behavior of wealthy clients in the GCC. Now, thanks to the financial crisis, which severely battered the reputations of some of the most well-known, established providers of wealth management services to the region, much of the wealth-advisory business is up for grabs,” said Dr. Daniel Diemers, principal at Booz & Company. Indeed, many high-net-worth individuals (HNWIs) moved their assets out of these global institutions and back onshore with local banks until the crisis passed. Now, they are ready to redeploy their capital and are mulling their options.

However, Middle East HNWIs have very specific characteristics. Most wealthy nationals are business owners or entrepreneurs. They often have multiple businesses and overlapping needs that range from corporate finance to personal wealth management. Their companies also often involve large extended families with various roles and interests. What’s more, the governance and finances of these family businesses can be opaque. Religion is also a factor in the GCC private banking market: Arab HNWIs often want some or all of their investments to adhere to Shari’a law. Unfortunately, designing Shari’a-compliant products that can match the returns, diversification, and liquidity of conventional products is difficult andfor certain asset classesstill almost impossible.

Successful Growth from Capabilities-Driven Strategies

These characteristics make the GCC private banking market unique but not impenetrable. To succeed, private banks must choose their cornerstones for growth, articulate sources of competitive differentiation, and select a distinctive, capabilities-driven strategic play. More specifically, local bankswhich often have rather unspecified private banking offeringswill need to take a number of steps to further increase the share of wallet with their wealthy clients: define their target client segments, improve customer-centricity, upgrade their value propositions, continue investing in state-of-the-art IT and sales and advisory tools, and transition to a more comprehensive, advice-based wealth management model

Meanwhile, the established, global players will need to defend their market share against local players by continuing to raise the bar on value proposition and operating model, while retaining best-in-class resources (and that includes keeping the best talent from being poached). Their challenge is to cost-effectively leverage their brand and global capabilities while maintaining a localized, “high touch” relationship model and catering more specifically to local needs in the GCC.

“As the region continues to recover quickly from the financial crisis, especially compared to some Western markets, we expect competition to heat up over the next few years as local players upgrade offerings and the global players—the incumbent private banking powerhouses—reassert themselves to defend and pursue market share", said Vayanos. There are four key success factors that will be necessary for these players to thrive in this challenging market:

  1. A comprehensive and integrated client offering that extends from individual wealth management to family business advisory services, including corporate finance and investment banking services.

  2. An acute sensitivity to cultural predispositions, family relationships, and behavioral preferences. Advice-led coverage models must consider investable assets, sources of wealth, ethnicity, and needs based on life cycle and life style.

  3. A best-in-class delivery model that serves the client in an efficient, personalized, and hassle-free manner, and is flexible enough to accommodate additional client requests, such as Shari’a compliance, comprehensive trust solutions, and offshore investment.

  4. A strong brand or at least an established track record in the region, a clear long-term commitment to serving clients in the GCC, and a strategy based on continuity and client centricity, not product sales and short-term profits.

“Last but not least, private banking in the Gulf requires immersion in the local cultures, where traditional private banking values—secrecy, security, diligence, trust, and honest and fair advisory relationships—blend well with cultural values and predispositions in the region,” added Diemers.

In Conclusion

The bottom line is that post-crisis, the GCC offers private bankers both opportunities and challenges. Those with aspirations in the region can analyze the GCC market in order to identify “sweet spots” of client needs, differentiate their wealth offering (and articulate this effectively to clients), and pursue a growth strategy related to the size and scope of their operations. “By taking these steps, private bankers from around the world, and from institutions of various sizes, can win a place in this lucrative, promising market. With the financial crisis coming to an end, now is the time to rethink your strategic positioning and seize the private banking opportunities in the GCC,” concluded Vayanos.