Can GCC banks capitalize on the rise of asset management?
The panorama of private wealth across the Middle East, Africa and South Asia is vast—$8 trillion, according to data from the Dubai International Financial Centre (DIFC). The wealth management sector may be roaring, yet banks in the six-member Gulf Cooperation Council (GCC) are in a distant second place when servicing the burgeoning market. Global wealth managers are racing to seal their dominance, armed with a technological advantage over their GCC counterparts, amid the rapid rise of artificial intelligence (AI).
But some analysts speculate that tech disruption offers an opportunity for GCC banks. Dubai alone is home to 55,000 high net worth individuals (HNWIs) and over half a trillion dollars of wealth, says Michael Ashley Schulman, partner and chief investment officer at Running Point Capital Advisors, a multifamily office. The DIFC noted in April that the number of wealth and asset management firms registered at the center exceeded 300. Recent investment managers at the DIFC include wealth heavyweights Edmond de Rothschild and Nomura Singapore.
Historically GCC banks have been unable to compete with what global banks offer. Local wealth preferred private banks that could provide better services in safe and secure locations such as Switzerland or the Channel Islands. Bhaskar Dasgupta, nonexecutive director, GCC, Israel and India Boards at Apex Group, says: “Traditional GCC banks had a rather static view of the private banking market, with basic services ranging from custody, lending and pushing standard funds to basic concierge services.”
It is also about the perception of global banks and the comfort levels of HNWIs. “The strong reputation, global presence and experience of these banks contribute to their preference,” says Bas Kooijman, CEO of Luxembourg-based securitization company DHF Capital. “Local banks just do not have the same visibility.”
AI Raises the Stakes
Generative AI may provide GCC banks a lever that could transform the region’s wealth management sector, Schulman believes: “Regional banks can leverage AI to offer sophisticated digital platforms and tools to enhance and tailor client services and experiences.” That transformation will depend on the agility of GCC banks. “Generative AI brings everyone up to a much higher playing field and democratizes business and creative processes,” Schulman says. “The big and slow will fall back or die, and the quick and nimble will achieve substantial gains.” GCC banks also stand to gain from the increasing need to integrate Islamic finance principles into the HNWI portfolios.
However, Dasgupta warns that AI is in its infancy, and claims there is more investment in the development of AI than in its deployment. “Some wealth management firms, from robo-advisers to private banks and external asset managers, are implementing elements of generative AI, genetic algorithms [and] neural networks to come up with a better presentation of investment opportunities, identification of customer risk profiles and how they evolve,” he says.
The authors of a report published by Celent last year predicted that the Middle East and Africa will see the fastest growth in IT investment, growing at an annual average rate of 5.4% to 2027. Cybersecurity is becoming a critical concern for HNWIs, but it is one area where GCC banks stand out. Ratings agency S&P Global noted in 2022 that strong capital buffers—a characteristic of most GCC banks—support cyber-resiliency. A surge of local interest in alternative investments such as cryptocurrencies also offers new opportunities.
Yet, the question remains whether GCC banks can adjust to the changes sweeping through wealth management. The precedent is not encouraging, according to Dasgupta. He adds that local banks were not quick enough to respond to earlier adjustments that included revisions to environmental, social and governance requirements; taxation; and new legal structures such as foundations.
Incorporating AI will require a significant rethink for everyone. But Middle East wealth managers should not merely add AI to current practices, Schulman says, but begin from a more naïve standpoint and relinquish some control to see if workflow and organizational charts can be recreated. “This should be easier for smaller regional firms than for global behemoths,” he says.
Nonetheless, the contest for HNWI clients will likely be fierce. Last year, the Middle East, Latin America and Africa were among the few growth areas. According to Capgemini’s current wealth management report, HNWI financial growth in the Middle East grew 1.5%, while North America’s and Europe’s HNWI financial growth contracted 7.4% and 3.2%, respectively.
A Fertile Environment
The conflict between Russia and Ukraine has triggered an influx of Russians bringing substantial amounts of cash into the region, notably to the United Arab Emirates (UAE). The UAE is now considered a safe haven by Russians and others, including Indians, who are together driving a red-hot real estate market.
These trends have implications for regional wealth management portfolios. Global bodies such as the Paris-based Financial Action Task Force expressed concerns, notably about the UAE and the capacity of local financial institutions to minimize know-your-customer risk.
GCC banks will also need to improve the productivity of relationship managers, an industrywide issue. Typically, relationship managers spend two-thirds of their time on noncore activities that do not generate revenue, Capgemini claims.
Yet talent is a challenge industrywide. Difficulty in retaining expertise might limit GCC banks’ capacity to reimagine wealth management, Dasgupta adds: “[GCC banks do not] have the talent pool—which is very rare and mobile—to appeal to the new wealth.” In the rivalry among global wealth managers, talent could be a defining issue, Running Point’s Schulman predicts: “At the end of the day, high-touch wealth management will continue to need a tailored blend of top people and top technology.”
Still, government support for the sector is strong. DHF Capital’s Kooijman argues that investment in infrastructure, tech, and talent by the banks could lead to high-quality wealth management services and build upon state-backed aspirations. “Regulatory initiatives and government efforts are also enhancing the transparency and attractiveness of the local banking sector,” he notes.
Last year the DIFC, which aims to double its size and contribution to Dubai’s GDP by 2030, launched the first global family business and private wealth center and forecasts that $1 trillion in assets will be transferred to the next generation in the Middle East during the next decade.
That may be an issue. According to Swiss wealth manager UBS’ 2023 Global Family Office Report, many family offices do not have the requisite processes, governance or risk management policies. That finding is particularly prevalent in the smaller family offices, managing assets from $100 million to $250 million.
Their apparent dearth of expertise and experience comes at a time when family offices are on the brink of the biggest shifts in asset allocation in several years, lifting allocations to hedge funds and adding to developed market fixed income and emerging markets equities. That is being driven by the perception that the US dollar has reached a peak and by the reopening of the Chinese economy, the Swiss bank predicts.
Family businesses are a major component of many economies in the GCC. With some imagination, GCC banks could leverage their experience of handling the day-to-day business of major family firms into the wealth management business, still with concerns regarding servicing, a quantum leap for many family offices.
Nevertheless, there are discernible changes afoot in regional banking, amid a growing recognition that private banking and wealth management may have been neglected. According to the Apex Group’s Dasgupta, GCC banks are now responding, with almost every bank reviewing its private banking strategies, implementing new technologies and recruiting, as well as upgrading the skills of its bankers. But will they be able to deliver? An $8 trillion opportunity hinges on the outcome.