Corporate banking plays a major role in the Middle East banking sector, accounting for nearly 75 percent of total banking assets and contributing some 60 percent of total revenues.1 The sector is also riding a wave of healthy returns as national economic diversification efforts create a wealth of new investment opportunities. Corporate banks in the region are generating average returns on equity of over 12 percent, far outstripping their European counterparts, which average just 7 percent, according to McKinsey Panorama Global Banking Pools. But impending structural shifts may threaten this comfortable position. To navigate them, Middle East corporate banks must significantly transform the way they operate, and potentially at a much faster pace than their global peers.

Meanwhile, the ongoing wave of banking consolidation is creating a new bracket of Gulf Cooperation Council “wholesale banks.” This may increase competition for the traditional client base of large corporates and state-owned enterprises, and further reduce lending and cross-sell margins. These new wholesale banks are joining international banks in offering treasury and transaction banking offerings, and could potentially dominate these highly profitable businesses. To remain relevant, corporate banks need to change their business models to effectively serve all customer segments, including medium and small corporates.

As is often the case, major structural changes will likely present exciting opportunities as well. The drive by several governments in the region to diversify their economies away from oil is one such change. For example, the Saudi Arabian Monetary Authority recently created a regulatory “sandbox” to help transform the Kingdom into an “intelligent financial center.”2 The sandbox aims to attract local and international financial technology companies to provide innovative financial services to Saudi markets, opening the Kingdom to a whole new type of investor.

Structural changes also bring challenges, which are exacerbated by the fact that many banks in the region have only limited capabilities—especially in transaction banking—and outdated infrastructures, which make it harder to adapt. Many are also behind in terms of automation and digitization—which makes serving smaller customers increasingly difficult at a time when regulators are pushing for a higher share of lending to the segment.

Established banks are also under threat from the evolution of their customer base. “Internationalization” and the increasing sophistication of domestic corporates is translating into a demand for a wider range of products, and to expectations for more strategic advice from their financial partners. The April 2019 tapping of public markets by Saudi Aramco (raising roughly $12 billion in bonds)3 indicates that banking clients can—and will—find alternative sources of funding.

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