While global banks grapple with post-pandemic challenges such as rising interest rates and economic volatility, banks in the Gulf Cooperation Council (GCC) are thriving, according to a new report by McKinsey & Co.

McKinsey’s analysis highlights a stark contrast. Despite global economic uncertainties, the robust operating environment in the GCC has propelled its financial institutions to outperform their international counterparts in 2023, a trend expected to persist.

Global banking faces many challenges, including rising inflation, rapid interest rate hikes, and geopolitical tensions. These factors have contributed to a 10% decline in the price-to-book ratio and a significant $900 billion drop in global banking market capitalization.

In contrast, the McKinsey report portrays a positive outlook for the GCC banking sector. It emphasizes that banks in the region have achieved “exceptionally high return on equity and some of the largest multiples worldwide.” This success is attributed to effective capital management and robust profitability strategies.

GCC banks have consistently maintained a higher return on equity and stronger market multiples than their global counterparts. Their advantage in efficient capital management is evident, with a 3-4 percentage point lead in ROE over the past two years.

Elevated interest rates, while posing challenges for global banks, have proven advantageous for GCC institutions. They have capitalized on record-high regional and international banking profits, generating substantial shareholder value. GCC banks also exhibit superior net interest margins and revenue-to-assets ratios compared to the global average.

While global economic interconnectedness offers growth opportunities, it also amplifies instability risks due to geopolitical tensions and stricter regulations. The accelerating pace of climate change, while a risk factor, also presents a multi-trillion-dollar opportunity for banks to finance the transition to low-carbon economies.

McKinsey predicts a potential decline in global banking conditions in the coming years, which could impact GCC banks’ return on equity. However, the report underscores that the region’s banking sector is better positioned to navigate these challenges than its global counterparts.

The report highlights the Kingdom of Saudi Arabia as a case in point. Financing in the region grew by 14% annually from 2019 to 2022, surpassing deposit growth. This growth is partly fueled by government initiatives that promote homeownership, influencing the retail loan portfolios of GCC banks. The increase in loans has raised concerns about potential liquidity issues, with the loan-to-deposit ratio for Saudi banks expected to rise by 142% by 2030.

To address these potential issues and navigate future uncertainties, GCC banks strategically access international debt capital markets to diversify their funding sources and mitigate domestic liquidity costs. While well-positioned, the report cautions GCC banks against complacency.