Dubai:
The UAE banking sector is facing challenging market conditions in terms of shrinking margins, rising costs, capital adequacy and liquidity regulations and technology disruptions that are capable of impacting business models, and thus these institutions need to focus on getting their balance right on these issues, according to KPMG, a leading global audit, tax and advisory firm.
“When GDP growth is slowing and banks and other financial institutions are being squeezed by more challenging market conditions, including the need to set aside increasing amounts of precious capital to cover impairments and non-performing loans, the sector is under tremendous pressure to innovate by optimising business processes and investing in new digital technologies — while at the same time complying with new regulatory reforms,” said Emilio Pera, Head of Financial Services for KPMG.
Banks in the country are already under pressure to meet the Basel III capital adequacy ratios and local regulations on capital conservation. KPMG said most UAE banks are adequately capitalised to meet the new regulations. The Central Bank of the UAE issued new regulations last week, effective from February 1, to ensure that banks’ capital adequacy is at least in line with Basel III requirements. In addition, they must hold further common equity Tier 1 (CET1) of 2.5 per cent of RWAs (fully loaded) as a capital conservation buffer, and manage their capital and dividends to maintain this buffer.
The new capital regulations announced by the UAE Central Bank require banks to maintain a minimum CET 1 of 7 per cent by 2017 with the countercyclical capital buffer (CCB) increasing each year until full implementation in 2019. Including countercyclical capital buffer the capital adequacy ratio (CAR) could go up to 13 per cent 14.26 per cent, 15.5 per cent in 2017, 2018 and 2019, respectively.
Complex changes are forcing banks to change the way they operate and address fundamental issues around profitability and future plans, with an initial focus, for those banks going through the liquidity coverage ratio (LCR) approval process, on the qualitative aspects of the liquidity regulations.
“Going forward, strategies will need to take into account potential liquidity constraints, and end results will determine by how much ‘the business’ can grow the balance sheet. Ensuring this is done properly can help reduce the risk of regulatory action, strengthen asset quality, protect banks and enhance their reputations with multiple stakeholders,” said Luke Ellyard, a KPMG partner who heads the firm’s financial services audit practice in the UAE.
These concepts are equally applicable in the case of implementation of IFRS 9. As IFRS 9 is likely to impact the way banks price and arrange loans, sell investments and manage financial assets, approaching this challenge positively will almost certainly bear fruit in the long run.
“The banks that are seeing positive outcomes from our first two challenges also tend to be positively focused on tax changes challenging businesses. Both VAT and common reporting standards (CRS) will have, or already have had, a significant impact on every UAE bank,” Ellyard said.
Some financial institutions are struggling to balance risk management with growth in the context of de-risking requirements impacting correspondent banking.
There are a number of ways that banks are responding to these challenges and establishing cyber security as a competitive advantage, rather than simply a compliance necessity. Banks are also increasingly the wealth of data they hold on their customers to improve the customer experience and enhance risk management by more accurately predicting issues, such as assessing who to extend loans to.
“While the UAE’s banks are well-run, well-resourced and seem set for future growth, it is critical that we all get the balance — between risk and opportunity or regulation and innovation — right,” said Umair Hameed, a Partner in KPMG Management Consulting.
