Dubai: UAE banks, especially those with large retail operations are headed for more redundancies as businesses is contracting fast and margins are thinning, according to banking industry sources.
Last month Emirates NBD acknowledged job cuts of 800 people on a single day. Sources in the bank said the numbers could climb further in the second half of the year.
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While ADCB has let go 400 people this month, a few other smaller banks too have been implementing job cuts and branch closures quietly. Two mid-sized banks are understood to be in the process of closing seven and nine branches respectively in the current quarter.
Difficult operating environment caused by COVID-19 resulting in sharp decline in business, a squeeze on interest income from low interest rate environment, fast adoption of digital solutions, risig loan impairments and shrinking loan demand are forcing many banks to rethink their business models.
A sharp surge in loan restructurings and impairments in the second quarter of 2020 has seen bank’s profits taking big hits, in some cases profits sinking as big as 45 per cent year on year. Large banks such as First Abu Dhabi Bank, Emirates NBD and Dubai Islamic Bank reported an average of 25 per cent decline in first half 2020 profits year on year.
Abu Dhabi Commercial Bank (ADCB) posted a 48 per cent decline in its first half 2020 net profit, largely driven by impairments related to NMC, Finablr and their associate companies. ADCB reported impairment charges of Dh2.55 billion in the first half 2020, up 117 per cent compared to Dh1.17 billion in in the same period last year.
“It is an extremely challenging environment and we are forced to let go some of our people and branches because we don’t see a sharp rebound in business happening to support the level of operations we previously had,” said the retail banking head of a local bank.
Shrinking loan demand
The UAE witnessed a decline in credit appetite for both business and personal loans during the second quarter of 2020, according to the second quarter 2020 Credit Sentiment Survey by the Central Bank of UAE.
The survey results showed credit demand from corporates and small businesses showed a decline, with over half of respondents, (53 per cent), assessing that demand has decreased either substantially or moderately. Almost a quarter of respondents saw no change in demand, while 22 per cent saw a moderate or substantial increase in demand.
Details on corporate demand for credit showed demand decreased across all corporate borrower categories except Government Related Entities (GREs) where it showed a slight increase.
Covid-19 was seen as the key reason for decline in demand for personal loans and tightening of credit standards. The trend is broadly similar for all product categories of personal lending such as personal loans, auto loans, mortgages and credit cards. The main explanation for the reduced demand in the second quarter was the adverse change of income largely driven by private sector job losses, but the housing market and financial market outlook also contributed.
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De-leveraging, tightening credit standards
Increased risk of defaults from both Small and Medium Enterprises (SME) and the retail borrowers have seen some banks deleveraging from these segments.
While many banks are understood to be strategically reallocating assets to top rated corporate borrowers and GREs, asset quality is becoming a major concern for banks, forcing them to tighten credit standards.
The latest credit sentiment survey showed 38.5 per cent of polled respondents said there has been no change in credit standard for corporates while 37.6 per cent said that their bank has tightened credit standards moderately, and 14.5 per cent answered that the tightening was significant.
In the personal loan space too, a moderate tightening of credit standards was reported by 47.4 per cent of bankers, while only 9.5 per cent reported significant tightening 40 per cent have observed no change in credit standards.
In operating costs, one of the most important components is staff costs. In 2019 UAE banks slashed close to 1000 jobs largely resulting form consolidation in the banking sector driven by bank mergers. A recent central bank report showed the number of employees in national and foreign banks declining from 36,448 employees in at the close of the second quarter of 2019 to 35,518 employees by the close of e third quarter of 2019.
Digital transformation and technology adoption are also helping banks to reduce number of branches and headcounts
While a few leading banks such as Emirates NBD and Abu Dhabi Commercial Bank have implemented significant job cuts last month, many others are quietly reducing head count in various departments.
The UAE’s banking sector is expected to a face a bumpy ride into the third quarter with the second quarter earnings reflecting the impact of COVID-19 on asset growth, asset quality and profitability.
Shedding operating costs will remain the biggest focus area for UAE banks in the next few quarters to arrest sharp decline in asset growth and profits and rising non performing loans (NPLs).
Responding to the slowing economies, most banks had initiated cost cutting measures even prior to COVID-19 becoming a global pandemic. During Q1 2020, cost to income C/I ratio of top 10 UAE banks improved by 110 bps, after rising for the previous quarters. The lower C/I ratio was reported due to decline staff costs associated with marketing expenses by 6.8. The decline in expenses was largely on the back of cost-cutting measures adopted by the banks, as eight of the ten banks reduced their expenses.