Dubai: The local banking sector continues to show strength and resilience as top UAE banks reported the region’s highest growth in their asset base of 19.5 per cent, according to a report by KPMG.
The study showed UAE’s top ten banks reported positive results in 2019, with an average 13.9 percent growth in net profit, the highest among GCC countries, driven by an increase in the overall loan book and inorganic growth.
The UAE’s Emirates NBD reported the highest net profit across the GCC, at $3.94 billion (Dh14.5 billion), and the highest return on equity at 21.8 per cent in 2019.
“The UAE banking sector has remained resilient, with overall good performance from the top ten listed banks. These positive financial results, coupled with the increasing focus on ‘digitization’ in the region, have resulted in a move towards a more innovative approach in “new age banking,” said Abbas Basrai, Partner and Head of Financial Services at KPMG Lower Gulf.
According to the KPMG study, the GCC banking sector continued to remain relatively resilient despite political and economic uncertainty in the region and across the globe. Asset growth remains robust as banks achieved double-digit growth at 12.8 per cent. Growth was driven by increased lending that grew by 11.8 per cent.
The loan books increased by 11.8 per cent on an average as compared to 2018 reflecting the continuous growth and activity that banks are both experiencing and supporting across the region. Profitability also continued to see a double-digit increase of 16.9 percent compared with 2018, driven particularly by a growth in loan books, a lower cost of funds and a continued focus on cost efficiencies.
The UAE banking sector has remained resilient, with overall good performance from the top ten listed banks. These positive financial results, coupled with the increasing focus on ‘digitization’ in the region, have resulted in a move towards a more innovative approach in “new age banking.
Capital adequacy ratio have increased slightly year on year by an average of 0.1 percent and currently stands at 18.5 percent on average – well above the minimum regulatory requirements. “Banks performed well in terms of asset growth and profitability in 2019, which is reflected in both fundamentals and market sentiment with share prices of 42 banks out of 55 showing an upward trend as compared with the previous year,” report said.
COVID-19 challenges & outlook
KPMG noted that Covid-19 is having an unprecedented impact on financial markets globally and locally and creating a unique situation for the industry. In the wake of the Covid-19 pandemic, the Central Bank of the UAE announced several relief packages. Banks must contend with many new regulations, as well as meet consumer demands for innovative, new digital banking products.
The overall long-term outlook for the GCC banking sector has moved from positive to stable according to KPMG. Banks are well positioned to weather the current economic and political challenges, given the expectation of continue government support and committed infrastructure investment, which will be somewhat offset by uncertainties arising from oil prices fluctuations and the COVID-19 impact, resulting in stable growth in the sector.
Lenders in the GCC have been rapidly consolidating as they seek to remain competitive. In 2019, most GCC countries experienced mergers, or talks to merge, both in the conventional and Islamic banking sector thus creating larger, stronger and more resilient financial institutions. One of the mergers announced during 2019, was a cross border merger between a bank from Kuwait and Bahrain. KPMG expects that this consolidation drive will continue in 2020 across the region, with numerous talks or potential further transactions.
Limited credit growth
With the challenging political and economic environment and increasing regulatory requirements, banks will continue pursuing a more measured approach in their lending activities and look to focus on the higher-end customer base. Credit growth is not expected to pick up significantly from last year given the economic impact of COVID-19 and significant fall in oil prices. In fact analysts expect banks to explore possible non-performing loan sales to manage their NPL ratios.
Rethinking of business models
In a world where we are witnessing rapid technological change and evolving customer requirements, banks are redefining how business is executed. “We are witnessing banks completely transforming and venturing into new age banking, be it through the use of Artificial Intelligence (AI) or going branchless to serve the customer base. We expect banks to aggressively pursue technological advancement and use revamped business platforms, partnering with various fintech firms,” the report said.
Evolving regulatory regimes
The increase in regulatory oversight and supervision witnessed over the last few years continued in 2019, and is expected to continue into the foreseeable future. With IFRS 9 fully implemented in the region, the Central Banks turned their attention to more pressing issues such as Anti Money Laundering (AML), Financial Crime, Culture and Conduct, Know Your Customer (KYC) and overall Corporate Governance.
Sustainable profit growth
The upward trend in profitability of GCC banks is expected to continue in 2020, although not necessarily at the double digit levels witnessed in 2019. The growth is likely to be modest and tempered by slower loan growth, shrinking profit margins and rising loan provisioning under the expected credit loss regime mainly driven by the economic impact of COVID-19.
Customer focus & innovation
Banks will continue to focus on their customers’ ever-changing needs and requirements. With the rapid pace of technological advancement in the financial services industry, banks will be looking to identify ways in which they can use innovation to gain a competitive advantage over their peers. Traditional banking channels will continue to be challenged in favor of more efficient and effective alternatives.
“Looking to the future of the financial services sector in light of the current pandemic we are experiencing, banks will need to innovate now more than ever to reach their customers through digital platforms and new mediums. Banks that are agile, flexible and willing to transform their business models will succeed, and secure their financial strength for future growth, while those that rest on their laurels will be left behind,” said Basrai.
Cost and operational efficiencies
Given the margin pressures banks have experienced across the region in 2019, KPMG expects cost and operational efficiencies to remain high on the management agenda. Banks are likely to look at more sophisticated ways in which costs can be managed through the use of robotics, analytics and fintech amongst others.
We do not expect capital and fundraising activity to pick up in 2020, given the uncertainties resulting from COVID-19 and the fact that regulators are relaxing the minimum capital adequacy and liquidity requirements in-line with more developed market for the short term. Some banks will however look to tap into bond markets to take advantage of the low interest rate environment in the second half of the year.