Uncertainty is giving way to optimism in the boardrooms of Gulf banks, buoyed by strengthened balance sheets and a process of consolidation that has not been interrupted by the violence of the Arab Spring.

As if the global economic downturn wasn’t turbulent enough, the violence and uncertainty of the Arab Spring has made it another rollercoaster 12 months for the Gulf’s banking sector. However, a two-year period of consolidation is giving way to increased optimism and balance sheets that make for better reading in the boardrooms of financial houses across the region.

There are still concerns: Emirates NBD, the UAE’s biggest bank by assets which made $626.1m in profits during the first nine months of the year, almost surpassing its profits for all of last year, may need to set aside as much as $2.2bn to cover bad loans over the next 13 months, according to a recent research note issued by Goldman Sachs. However the key players in the Saudi banking sector, including Al Rajhi Bank, the kingdom’s largest lender by market value, are eyeing steady growth by virtue of their strong profitability, stable asset quality and large retail deposit base. And it’s a story that is repeated elsewhere in the Gulf, from Abu Dhabi to Kuwait City to Doha and beyond.

Bank asset growth reinforces lending

According to the UAE Central Bank, total bank assets in the country have registered sound growth in 2011, rising 4% in the first ten months of the year to $455bn as of end-October. This reinforcing of the balance sheets has been accompanied by a healthy rise in lending – loans made by UAE banks edged up by 4.1% in the first ten months of the year, up to $292bn as of end-October, boosted by a significant leap in September. And after a year of consolidation, UAE banks are not alone in moving into 2012 in a comfortable position.

Commercial banks in Saudi Arabia, the region’s largest economy boasting its most sophisticated banking sector, registered total assets of $409bn as of end-October 2011, a rise of 7.7% in the first ten months of the year, and a jump of 10.3% since end-October 2010. Lending has increased too, with ten out of 11 Saudi publicly traded banks raising the value of their loan portfolios in the first nine months of the year, according to statements from the banks. Alinma Bank, an Islamic lender, had the largest increase at 75%, followed by Bank Al Jazira at 19%, with Al Rajhi Bank and Bank Al Bilad each registering a 12% increase in the nine months to end-September.

In Kuwait, assets stood at close to $157bn, up 4.9% in the first 10 months and over a 12-month period. Qatar has not yet made available its statistical bulletin for the month, but is expected to register healthy asset growth among local banks, while in Oman the assets of commercial banks stood at $44.7bn as of end-September 2011, the latest available figures, indicating a rise of 9% in the first nine months of the year and an 8.7% rise year-on-year. Only in Bahrain, which has violently suppressed Arab Spring protests, resulting in the deaths of more than 35 people amid allegations of widespread human rights abuses, are the figures less encouraging: the assets of retail and wholesale banks in the island state stood at $536bn as of end-October 2011, down 9.9% since January and 7.4% over a twelve-month period.

Increased competition from global banking groups

It is likely, however, that 2012 will present a different challenge to those banks that have recovered in the wake of the global economic downturn. Competition from global banks is likely to rise as financial houses from outside the region attempt to tap the growth potential of the Gulf market. And with this in mind, Gulf banks are likely to have to improve their offerings in 2012, if they want to retain current clients and attract new business. They are also going to have to battle hard to retain key staff: with competition building in the region’s banking sector, those employees who are able to operate effectively in such a fast-evolving market will become an increasingly valuable commodity.

A number of regional banks have put salary and bonus increases in place, as well as adding mentor programs for staff development. However, a recent Accenture survey of executives at major Gulf banks found that demand for skilled banking staff is outstripping supply in the region even at a time when the Western banking industry is slashing its workforce dramatically. UBS has said that it will cut more than 2,500 jobs, and 1,500 positions will be cut at Credit Suisse. Deutsche Bank is set to eliminate around 10% of its investment banking staff, while Nomura is cutting 400 operations positions and BNP Paribas is planning to trim 1,400 jobs in investment banking.

The Accenture survey said that a shortage of skills is the biggest challenge facing the GCC banking industry, aside from new regulation; a skills shortage was cited by 58% of all executives surveyed by Accenture, and 69% of those from the largest banks. Almost two-thirds (64%) or respondents said that the greatest impact of more global banks operating in the region will be the increased competition for skills and talent over the next few years, while a majority (89%) of respondents said that attracting and retaining talent will be the most important strategy their banks will use to increase shareholder value.

With significant untapped youth and female markets – more than half the population in the GCC is below the age of 30, and the female employment rate has grown considerably over the past 10 years, from 30% in 2000 to 37% in 2011 – banks are also aiming to improve customer service and meet increased demand for online and mobile services. All of this will be nigh-on impossible if banks refuse to pay top dollar to retain top staff; if the region’s financial institutions are to continue their recovery and build on the growth of 2011, cost-cutting may have to take forms other than redundancies and penny-pinching behind the cashiers’ desks.