For UAE banks, it’s a time to look within

On all fronts, 2016 is set to be a challenging year for banks, both in the UAE and regionally. After three years of robust growth of 8-10 per cent across the sector, 2016 is expected to see both a slowdown in borrowing, as well as dents to banking profits.

There will be growth opportunities — taking advantage of Iran’s reconnection to the global economy, for example — but the opportunities will be selective and uncertain, and the overall environment will be turbulent.

Recent headlines suggest that many banks are being proactive about the strong headwinds that they are facing: an estimated 1,500 people have recently been laid off from the sector locally. Banks that put their houses in order during the current slowdown will emerge stronger, more resilient and better positioned for growth than their competitors.

There are five key questions that management should be asking when assessing whether they are taking the necessary steps to get their house in order.

Firstly, how successful is the bank at retaining customers and developing loyalty? Historically, banks in the region have grown by attracting new customers. Given the high net population growth that the UAE has experienced over the last five years, this has been a viable strategy.

However, with the rate of immigration slowing from 21 to 13 migrants per 1,000 people, banks will either have to lure customers from other banks, or focus on growing business from existing customers. For either strategy to work, banks will have to make a shift from being sales-led organisations to being customer experience-led organisations.

Through better relationship management and developing convenience banking, institutions can focus on retaining and building loyalty in the customer base.

Secondly, how creative is the bank about managing costs? In many ways, cutting costs will be tougher than developing customer loyalty: a lot of the low-hanging operational costs have already been squeezed out of the system by streamlining procurement, rationalising IT, managing real estate and driving digitisation.

But before further cutting headcount, banks should consider more creative ways to achieve the next level of efficiency. One approach is to incentivise staff to identify additional value and drive cost reductions bottom-up across the organisation.

Banks coming out of a downturn with an experienced, loyal workforce will inevitably be in a strong position. Those that don’t have that, won’t be.

Another key question is whether the bank is focused on actively collaborating with clients in the management of underperforming — and non-performing — assets? An estimated Dh50 billion of loans are underperforming: a worrying sign that not enough is being done to restructure or renegotiate debts.

In addition to regularly reviewing and making appropriate changes to their underwriting polices, banks will have to shift their attitudes towards proactively partnering with clients to find workable solutions to repayments, collaborating with their corporate clients to help address cash flow issues and offering restructuring services. This will be especially important for banks with large SME and mid-market portfolios, which is likely to be the most distressed segments.

Fourthly, how seriously does the bank take compliance? By virtue of its geographic proximity to at least six high-risk countries in terms of doing business, UAE banks are under increasing pressure to strengthen their compliance practices. In 2014, the value of the UAE’s remittances was Dh106 billion — and the actual value of total outbound foreign currency was significantly larger.

Involvement in these cross-border transactions is at risk for local banks who are behind the curve on compliance, as global banking institutions demand that local partners meet ever higher anti-money laundering standards.

Finally, does a risk-based culture permeate the bank, starting all the way at the top? Estimates suggest that banks lose around 0.5-1 per cent of their revenue — so close to Dh500 million in 2015 — to ‘leakage’, including human error. Larger banks with expansive branch networks are far more prone to this than smaller banks, but cybercrime is on the rise and threatens large and small institutions alike. To effectively combat these operational risks, having the right processes, systems and controls is vital, but not enough.

Creating a risk-based culture, through training and retaining good people, while avoiding adversely affecting customer experience, is the key to minimising losses.

The UAE’s banks have been here before, in 2008—09, and the best already have strong answers to these questions. They learnt from hard experience. But with 2016 looking like it’s going to be challenging, it’s important that they ask themselves the same questions once again and keep driving efficiency.

The writer is the Managing Director of Alvarez & Marsal M.E.