If the 2014 financial results are the litmus test for the overall health of the UAE banking industry, then we have a unanimous verdict. It was a bumper year. Most banks have shed the baggage, financial and emotional, from the last economic downturn. Today, the industry can boast of having spent the last couple of years on an aggressive growth trajectory.
In 2013 and 2014 retail financing/loans grew at over 15 per cent a year. Spend volumes on cards have doubled over the past three years. That’s a stellar performance by any standard. While stability in overseas markets helped, the global recovery is just part of the comeback story. There are a number of local factors that have accelerated this robust turnaround for UAE banks.
Retail banks rebalanced the risk reward equation and overhauled their credit strategy. Today, sophisticated application scorecards for financing/lending and behavioural models to manage portfolios are the rule rather than the exception.
In addition, banks have been forced to diversify their sources of revenue, creating stronger customer propositions across all retail product lines. They have also got better at “big data”, relationship management and cross-selling. The masterstroke, however, came from the local regulator in the form of a flurry of changes. These included a minimum income criteria for credit cards; an income multiples cap for personal financing/loans; a max debt service ratio for all consumers and a financing/loan to value cap for mortgages. All of these changes are enablers for sustainable consumer credit.
Meanwhile, the regulator has pushed forward with consumer protection, creating customer friendlier terms. For instance, regulation around early settlement charges (the cost of switching banks) for personal financing/loans and mortgages has now been capped at 1 per cent (previously as high as 5 per cent). This has meant banks have had to become more competitive to hold on to their customers. That doesn’t just mean lower costs of financing, it has also spurred banks to rethink internal processes, invest in service quality and enhance the use of technology in order to deliver an improved customer experience.
A much awaited national credit bureau also went live in 2014. Prior to this, bank financing/lending was based on an assessment of an applicant’s bank statements and self-declared liabilities. This exposed financiers to credit risk in the form of over stated payment capacity. The bureau will help financiers make more informed decisions that fully consider the aggregated credit history and current financial obligations of consumers.
Retail Banks have emerged stronger, more prudent and better equipped to deal with what the complex global financial maze will throw at them. What the past crisis has taught us is that economic cycles are a reality and the UAE is part of an intertwined, interdependent, fully connected global economy. And this will create further challenges.
Oil prices remain well below the $100 (Dh367) mark. Today’s prices are still well above break even, but if they continue to remain at existing levels, banks may have yet another challenge on their hands. However, any adverse impact on the local economy is likely to be lagged, and there are a number of factors that can help sustain the growth momentum in the face of lower oil prices. Government spending, especially in Dubai leading up to Expo 2020, would help. A lower reliance on oil through increased non-oil revenue, continued interest in UAE tourism, strong economic growth in large developing economies like India and China and sensible monetary policies in the more developed economies, such as the US and EU, would all help the macroeconomic environment.
Another potential dampener could be falling UAE property prices. We are already seeing minor corrections in house prices and more supply — estimated at over 20,000 units in 2015 — may exert further downward pressure. This could slow down new mortgages in the short run as buyers defer their purchase decisions and wait for the market to bottom out. The good news is that everyone has learnt from past experience. Neither the price adjustment, nor the slowdown in home financing, is likely to be anywhere near as severe as last time.
While risks will persist, there are numerous positive developments to look forward to. Banks are cognisant of the fact the customer experience is increasingly important. This is especially relevant as regulatory mandates drive product homogeneity in an already overcrowded market. Customer service will only get better. It has to.
Closely related to the customer experience is technology, a key enabler for outstanding service delivery. It will play a vital role in the next phase of the banking evolution. While this is a global trend, early adoption of technology is likely to be more pronounced in the UAE. It already has the highest smartphone penetration in the world. It will not be long before we see the emergence of another trend where cash, still the overwhelming mode of payment in the UAE, is displaced by plastic, e-commerce, NFC (near field communication) payments, mobile wallets and other technology driven initiatives. These initiatives will facilitate the rapid digitalisation of the payments process.
As the old joke goes, the questions in economics exams are the same every year; only the answers change. A lot has changed in banking in the last six years, most of it for the better.
Mohsin Aikal is the Head of Consumer Finance, Noor Bank. Views expressed here are personal and do not reflect that of the bank and newspaper