Dubai: The UAE’s banking sector which reported resilient performance last year is expected to face challenges from rapid technology innovations, new regulations, the impact of value added taxes and the need for strong corporate governance frameworks, according to KPMG.
KPMG’s third edition of the annual UAE banking perspectives report said, Artificial Intelligence (AI), blockchain and Fintech have emerged as the major technological disrupters that will change the way banks operate and help them achieve cost optimisation.
Banks are increasingly combining robotic process automation (RPA) with artificial intelligence to differentiate customer engagement. Some banks are even exploring automated decision-making based on sentiment analysis by extracting data from millions of emails and other data sources. Banks in general are targeting to improve operational efficiency, increase revenue and reduce risk through the implementation of blockchain applications.
“Banks in the UAE are operating in very dynamic times. The introduction of new laws and tougher regulations is putting tremendous pressure on banks to rethink their business models. With technological innovation, there is the growing risk of more aggressive cyber-attacks, resulting in a greater need for vigilance,” said Emilio Pera, Partner and Head of Financial Services, KPMG Lower Gulf.
The banking sector has often been in the forefront of adopting new technologies, and Artificial Intelligence (AI) is no different. According to KPMG about 90 per cent of UAE CEOs are considering how to integrate basic automation with A. “The way customers expect to interact with banks has changed significantly: they now demand omni-channel access. This is resulting in a rapid adoption of electronic channels in the banking sector and money increasingly moving in a digital manner,” Pera said.
In addition regulatory changes such as the implementation of International Financial Reporting Standards (IFRS 9) that has come with far-reaching changes in many areas such as financial reporting, risk management, capital management, regulatory reporting, data sourcing and collection, governance framework and IT systems have come with balance sheet implications for banks.
Profitability
While most banks have factored in the balance sheet impact of IFRs 9, it is expected to be more visible in the financial statements for the first quarter of 2018. “There will be substantial impact as banks comply with the new reporting standards. While the increase in provisions is not as severe as in Europe, they are substantial and will require banks to reflect on the profitability of some business lines in their current format,” said Luke Ellyard, Partner Financial Services, KPMG.
As banks grapple with the new VAT regime and the high compliance costs associated with mandatory VAT registration and the inability for banks to claim all input VAT due to a large proportion of their services being exempt, the report states that banks could be forced to increase their fees to compensate for the additional costs.
Cybersecurity has emerged among the top priorities in the board room, as any breach could undermine the trust that customers have in their bank, and affect the future profitability and sustainability of the organisation.
Amid the technology transformation and regulatory changes happening the banking sector, KPMG sees the need to reinforce strong corporate culture and governance structures for the banking sector.
Healthy performance outlook for 2018
Amid rising operating costs linked to technology adoption and compliance to new regulations, the UAE banking sector has a healthy outlook for 2018, according to KPMG.
“The last year has seen the emergence of an increasingly disruptive banking sector which has heightened the degree of both opportunity and threat. Despite this, the general picture is a healthy one, with the sector continuing to surpass that of the wider UAE economy in 2017: the top ten banks’ total asset growth exceeded 5 per cent,” said Emilio Pera, Partner and Head of Financial Services, KPMG Lower Gulf.
While the net profits for the top 10 banks improved 6.6 per cent year on year in 2017, net impairment charges on loans and advances improved by 7.6 per cent year on year to 3.4 per cent. With the UAE economy expected to grow in excess of 3.5 per cent compared to about 2 per cent last year analysts expect the banking sector to deliver stronger results during the current year.
“We are also confident that banks are in better shape compared with a year ago, in terms of having a more long-term, ethical and consequently more trustworthy culture. Banks will now have to embrace change if they are to operate to their optimum over the next nine months,” Pera said.
— B.D.A.
