Saudi Gazette

Financial crisis triggers war on deposits

The global financial crisis has hit Gulf banks hard. The catalysts that boosted their growth—high oil prices, a booming real estate market, and strong credit ratings—have run out of steam.

By Julien Faye and Sameer Chishty

First published on abril 10, 2009
min read


The global financial crisis has hit Gulf banks hard. The catalysts that boosted their growth—high oil prices, a booming real estate market, and strong credit ratings—have run out of steam. The challenges now are many. As the region's equity markets tumbled, so did the banks' lucrative wealth management services. The likelihood of additional asset write-downs has triggered concerns about banks' balance sheets. Moreover, some Gulf bankers have seen cheap wholesale funding dry up and are reluctant to lend to each other, leading to higher cost of funds and liquidity shortfalls. The region's banks are now locked in a battle for the lifeblood of banking—retail deposits. Winning this battle may be a matter of survival. The deposit opportunity is big as Gulf investors keep over 40 percent of their financial wealth in deposits. Deposits are also a low-cost source of funds. They can cost banks as little as one percent of capital versus seven percent for bonds. To make the most of the deposit opportunity, banks need to focus on four areas: pricing, products, promotions, and people. 1. Pricing: Be nimble Banks must urgently deal with how best to price offerings to lure and retain depositors. The big risk is that banks will be dragged into a price war, encouraged by government deposit guarantees. Simply to offer higher rates for deposits will only encourage customers to churn their accounts. Gulf bankers need to ensure the rates they pay on deposit products are aligned with their average cost of funds. They can also be more analytical about gauging how responsive different customer segments are to different rates. Lenders can offer rate-sensitive depositors higher-yielding products. In the UAE, a foreign bank offers a six percent rate of return on a one-year AED50,000 (around $13,500) deposit. Smart banks will compensate less rate-sensitive customers by emphasizing convenience and benefits. Banks must closely monitor competitors' moves and act preemptively to retain customers—without triggering a price war. Some banks are converting short-term demand deposits into longer-term holdings. Several local banks are looking at offshore depositors. 2. Products: Innovate The most innovative banks develop a deep understanding of customer buying behavior and target product offerings accordingly. By bundling products, for example, banks can offer savings accounts that entitle the holder to a home loan at a preferential rate once the customer accumulates enough assets in his or her deposit account. Watch for Gulf lenders to boost product offerings by highlighting non-price benefits such as a tie-in with an airline where a depositor gets miles for opening an account. Some banks, like HSBC, have already started innovating. Its new "e-saver account" permits UAE customers to open the account instantly online with no management fees, no minimum balance and a 5.3 percent rate. 3. Promotion: The right timing Smart banks will promote attractive offers when customers are most likely to respond, such as when a customer's deposits mature. To build awareness of deposit products, they will launch promotional campaigns visible to customers wherever they come in contact with the bank—from branch windows to ATM receipts. Bankers can also increase deposits by providing incentives to customers with salary accounts to directly deposit a percentage of their earnings each month. 4. People: Recruit, reward With the spotlight on deposits, banks will recruit top talent to staff product management and marketing support for their deposits operation, as well as to build high-powered analytical capabilities. They will deploy their new talent to improve the end-to-end customer experience, such as setting up effective application processes. Successful banks will also set up dedicated deposit teams and reward employees who bring in new deposits and cross-sell products to existing customers. For Gulf banks coping with falling profits, the stakes couldn't be higher in the battle for deposits. Those banks that are analytical and innovative enough will become the places where much of the Gulf's money is kept. Or, at least, they will secure their positions in a region that still has strong long-term growth prospects. Julien Faye leads the Financial Services practice for Bain & Company in the Middle East and is based in Dubai. Sameer Chishty is a partner in the firm's Financial Services practice, based in Hong Kong.

The global financial crisis has hit Gulf banks hard. The catalysts that boosted their growth—high oil prices, a booming real estate market, and strong credit ratings—have run out of steam.

The challenges now are many. As the region's equity markets tumbled, so did the banks' lucrative wealth management services. The likelihood of additional asset write-downs has triggered concerns about banks' balance sheets.

Moreover, some Gulf bankers have seen cheap wholesale funding dry up and are reluctant to lend to each other, leading to higher cost of funds and liquidity shortfalls.

The region's banks are now locked in a battle for the lifeblood of banking—retail deposits. Winning this battle may be a matter of survival.

The deposit opportunity is big as Gulf investors keep over 40 percent of their financial wealth in deposits. Deposits are also a low-cost source of funds. They can cost banks as little as one percent of capital versus seven percent for bonds.

To make the most of the deposit opportunity, banks need to focus on four areas: pricing, products, promotions, and people.

1. Pricing: Be nimble

Banks must urgently deal with how best to price offerings to lure and retain depositors. The big risk is that banks will be dragged into a price war, encouraged by government deposit guarantees. Simply to offer higher rates for deposits will only encourage customers to churn their accounts.

Gulf bankers need to ensure the rates they pay on deposit products are aligned with their average cost of funds. They can also be more analytical about gauging how responsive different customer segments are to different rates. Lenders can offer rate-sensitive depositors higher-yielding products. In the UAE, a foreign bank offers a six percent rate of return on a one-year AED50,000 (around $13,500) deposit. Smart banks will compensate less rate-sensitive customers by emphasizing convenience and benefits.

Banks must closely monitor competitors' moves and act preemptively to retain customers—without triggering a price war. Some banks are converting short-term demand deposits into longer-term holdings. Several local banks are looking at offshore depositors.

2. Products: Innovate

The most innovative banks develop a deep understanding of customer buying behavior and target product offerings accordingly. By bundling products, for example, banks can offer savings accounts that entitle the holder to a home loan at a preferential rate once the customer accumulates enough assets in his or her deposit account.

Watch for Gulf lenders to boost product offerings by highlighting non-price benefits such as a tie-in with an airline where a depositor gets miles for opening an account.

Some banks, like HSBC, have already started innovating. Its new "e-saver account" permits UAE customers to open the account instantly online with no management fees, no minimum balance and a 5.3 percent rate.

3. Promotion: The right timing

Smart banks will promote attractive offers when customers are most likely to respond, such as when a customer's deposits mature. To build awareness of deposit products, they will launch promotional campaigns visible to customers wherever they come in contact with the bank—from branch windows to ATM receipts.

Bankers can also increase deposits by providing incentives to customers with salary accounts to directly deposit a percentage of their earnings each month.

4. People: Recruit, reward

With the spotlight on deposits, banks will recruit top talent to staff product management and marketing support for their deposits operation, as well as to build high-powered analytical capabilities. They will deploy their new talent to improve the end-to-end customer experience, such as setting up effective application processes.

Successful banks will also set up dedicated deposit teams and reward employees who bring in new deposits and cross-sell products to existing customers.

For Gulf banks coping with falling profits, the stakes couldn't be higher in the battle for deposits. Those banks that are analytical and innovative enough will become the places where much of the Gulf's money is kept. Or, at least, they will secure their positions in a region that still has strong long-term growth prospects.

Julien Faye leads the Financial Services practice for Bain & Company in the Middle East and is based in Dubai. Sameer Chishty is a partner in the firm's Financial Services practice, based in Hong Kong.