Strategic imperatives for UAE banks amid pandemic-stricken change

Innovation, digitalization, customer-centricity, compliance and better management of cost and risk are some strategies that banks in the UAE can employ – as they emerge from a year of shrinking profitability. A new report from KPMG expands on these imperatives. 

Per KPMG’s analysis, UAE’s top 10 banks combined saw a 40% plus dip in profitability last year compared to 2019 – mainly owing to pandemic-induced market factors. These top banks are: Abu Dhabi Commercial Bank; Abu Dhabi Islamic Bank; Commercial Bank of Dubai; Dubai Islamic Bank; Emirates NBD; Mashreq Bank, RAK Bank, First Abu Dhabi Bank; National Bank of Fujairah and Sharjah Islamic Bank. 

Interest rates are hovering at or near zero, while credit defaults from businesses and private customers skyrocketed amid a squeezed economy and crippled consumer spending.

These factors are not unique to the UAE: the global banking sector could according to McKinsey lose more than $4 trillion in the next three to four years owing to the present crisis. In the UAE, net profit among the top ten banks fell by more than $5 billion last year, while non-performing loans increased from 3.6% to 4.4%. 

Provisioning for a barrage of expected loan defaults drove up the overall cost-to-income ratio, by more than 1%. Returns on assets fell by nearly the same amount, while returns on equity also took a hit. All this while historically low interest rates kept margins at a minimum. 

The only good news is that capital adequacy ratios across the top ten UAE banks actually rose by 70 bases points last year – signaling healthy capital reserves to tide over the crisis. Still, there is no economic certainty on the horizon as of now, and banks need to act to ensure that their profitability doesn’t evaporate further.

On the agenda is a fundamental overhaul of current operating models, to cut costs, boost efficiency and gain a competitive edge in new market conditions.

Leading this charge should be a digitalization drive. At the back end, banks can cut reliance on people and paper – automating key processes and freeing up staff for value-adding tasks. A strong, cloud-backed IT infrastructure can enable smoother transitions to flexible working arrangements, and enable a secure exchange of valuable data.

At the front-end, banks must embody the cutting-edge consumer experience increasingly being delivered by the booming FinTech landscape – across loans, payments, investment and wealth management among others. One option is to replicate these offerings, while the alternative is to break free from the traditional operating model – as explained by KPMG Lower Gulf head of financial services Abbas Basrai. 

“Banks are being forced to consider alternative models utilizing cutting-edge technology, including Banking as a Platform (BaaP), which allows third-party FinTech developers to build products and services on behalf of bank customers.” 

“Today’s customer is generally seeking a self-service, seamless, automated, and omnichannel experience – with minimal waiting time. To enable this, banks across the Middle East are digitalizing complex processes and end-to-end customer journeys across the front, middle and back offices.”

Using agile, customer-centric methodologies such as design thinking can help banks reach achieve these goals – reaping all the related cost, productivity and customer acquisition benefits in a tight economy.

Other modernization strategies – as highlighted by KPMG – include a focus on restructuring rather than liquidation to preserve long-term value, and a strong governance framework to ensure compliance with a rapidly evolving regulatory landscape. These strategies combined should keep banks in business through the upcoming uncertainty. 

“Banks are witnessing a time replete with dissonances: great technological advancement tempered by the potentially catastrophic implications of the pandemic. They should deliver on the promises they make to customers, ensure their experience is seamless, and fortify their control environment against the threats that abound,” concluded Basrai.