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A return to strong growth requires UAE banks to ditch their current playbook. New rules of engaging with clients need to be scripted. Image Credit: Gulf News Archive

There are many unanswered questions regarding the Covid-19 crisis, the first of which is the ultimate impact on human health. Yet, despite the many uncertainties that await us on any potential road to recovery and normality, two things are already apparent.

Firstly, the crisis has thrown global markets into a volatile state, prompting companies to seek an optimal way to navigate their way through. Second, financial institutions must have clear strategies to maximise their resilience and prepare for any scenario which may occur.

Undeniably, the global economy is facing a triple shock due to the alarming drop in market confidence and mounting disruption to supply and demand. Amid economic upheaval and falling oil prices, bank CEOs in the Middle East must use data effectively to make the correct decisions quickly. Doing so will unquestionably be the difference between institutions preserving their status and coming under ever-increasing pressure.

Problems, but not insurmountable

The latest estimates with a significant degree of approximation points towards key issues on financial institutions’ performance, where profitability may drop by 40-60 per cent, the cost-to-income ratio may increase by 15 per cent, margins may decrease by more than 20 per cent, and non-performing loans may surpass 10 per cent.

Middle East financial institutions have already faced similar challenges, with an additional range of operational issues in light of Covid-19 — such as how to operate branches remotely, how to serve trading floors, how to manage risks, how to optimise investment management in turbulent markets, and how to handle profitability hits.

The list is growing longer, emphasising the enormity of the challenges. Specific clients have specific needs — new lines of credit in corporate banking to offset possible liquidity shortages and relocation of assets in wealth and asset management from investment accounts or deposits to fill business needs.

Similarly, particular product lines and businesses are also facing potential consequences — a halt in international trade flows, failures that could arise from the supply side, transaction banking difficulties due to an unprecedented rise in online payments, and substantial declines in cash payments.

Moreover, there is a growing risk of a recession, and demand for most products and services offered by banks would stop should this transpire.

Checking for solutions

The UAE Government has approved Dh126 billion in the economic stimulus packages, with Dh100 billion announced by the UAE Central Bank to provide more liquidity to banks and Dh26 billion by the UAE Government for additional measures to support the economy. In addition, emirate-level stimulus packages were also launched, including Dubai’s Dh1.5 billion focusing on 15 initiatives to support business operations and Abu Dhabi’s package to enhance the implementation of “Ghadan 21” economic activities.

Similar preventive measures are also being taken across the Middle East to protect these economies and ensure financial institutions survive the current challenging conditions. Yet despite such endeavours, leading figures at financial institutions are asking: “How should we navigate through the Covid-19 crisis?”

Make that fast switch

For starters, banks should accelerate their plans concerning digital sales and services. Although many have launched initiatives in this direction, all should speed up operations to achieve retail and wholesale client migration to online, as well as promote new ways of working and interacting between relationship managers and clients through remote channels such as phone and video.

Virtual branches, distributed call centers, the rising interest in digital banks, and online payments and services are offering new opportunities for banks to rethink their operating model and to develop a resilient and cost-efficient “new generation” way of doing things.

At the same time, all should prepare for new business and partnerships. Economic shocks are difficult to navigate and endure; however, they can present unexpected opportunities. During this time, companies should, at the CEO’s direction, research, and screen potential consolidation and collaboration opportunities — aiming to enhance the business while being mindful that the next economic struggle may be more difficult.

Furthermore, managing physical networks and promoting alternatives is also a necessity. Banks should devise a scenario plan not only at the beginning of a lockdown but should already now plan for the way out.

Which branches to open first? How to staff them? Sequence of relocating employees back to the head office and operations units? Or should banks continue to operate in a virtual or distributed manner to leverage the agility and flexibility of the current system?

Undoubtedly, banks will continue to be confronted with challenges. However, if proactive steps are taken through prudent leadership, measures will be in place for institutions to navigate through the crisis, maintain stable financial profiles, and be prepared for economic difficulties that will occur in future.

- Markus Massi is Managing Director & Senior Partner at Boston Consulting Group. Godfrey Sullivan is Managing Director & Partner at BCG.