Dubai: During 2020, net profit at the Top 10 banks in the UAE dropped by 41 per cent on average compared with 2019. This calls for greater innovations, according to the consultancy KPMG.
Grappling with pandemic-induced stress on businesses, as well as continuously evolving consumer behaviour, banks need to bolster back-end functions and remain vigilant in terms of governance and corporate culture, KPMG said in its sixth UAE banking perspectives report.
With revenue pressure expected to continue in 2021, the only way banks are likely to maintain profit margins will be by strictly managing costs. Underlying this is the need to bolster back-end functions, which tend to be driven by people and paper
The sharp drop in profitability is attributed to the significant increase in the provision charge on loans, with banks expecting higher losses and customer defaults as a result of the pandemic. While banks’ capital and liquidity position remains strong, issues relating to counterparties’ creditworthiness and provisioning persist.
“With revenue pressure expected to continue in 2021, the only way banks are likely to maintain profit margins will be by strictly managing costs. Underlying this is the need to bolster back-end functions, which tend to be driven by people and paper, rather than merely focusing on what is visible to the customer,” said Abbas Basrai, Partner and Head of Financial Services, KPMG Lower Gulf.
The challenge for banks in 2021 will be to effectively extract value from data to help them focus on their most profitable segments. With revenue pressure expected to continue, the only way banks are likely to maintain profit margins is by strictly managing costs. Underlying this is the need to bolster back-end functions, which tend to be driven by people and paper, rather than merely focusing on what is visible to the customer. The imperative for strong IT infrastructure is more relevant than ever as lockdowns have rendered invaluable effective remote-working technology.
In a difficult market, KPMG underlines how banks are digitalizing complex processes and end-to-end customer journeys across the front, middle and back offices. Innovating and serving customers is at the forefront of disruption and change, which is supported by a delicate balancing act of the core and non-core functions while leveraging the cloud for operational resilience.
With challengers quick to adopt innovative technologies, traditional banks need to chart a different route. According to Basrai, banks around the world increasingly find value in partnering with digital challenger banks and brokering their products in online marketplaces. The same can be replicated in the UAE. Instead of trying to imitate the way FinTech companies approach technology development, traditional banks may do well to capitalize on FinTech innovations by incorporating external products and services in their portfolio.
The KPMG report also highlights the role robust regulatory compliance and governance play in transforming operational strategy. The publication highlights how over the last two years alone, local authorities have issued or revised many regulations to enhance financial stability, including on corporate governance and risk management.
For statutory audit, the report recommends frequent bilateral (regulator and auditor) and trilateral meetings (including the bank) between parties to create a better understanding of the audit approach.
Need for consolidation
While organic growth has been minimal, in the UAE, one of the most notable trends is an inclination toward consolidation. With around 50 banks, plus new digital banks coming up, serving a population of approximately 10 million, the UAE could still be considered ‘overbanked’. Further merger and acquisition activity, therefore, may well take place.
In times of uncertainty, canny liquidity management can be vital. “Recently, we have seen a surge in NPLs for the majority of banks worldwide; many have booked higher provisions," the report said. "Banks should perform adjustments to their credit risk models to increase responsiveness to external factors and improve the accuracy of their market predictions."