5 minute read
Foreseeable pain points for banks
from #229 - April 2020
Bhavin Shah, Partner at Roland Berger’s Dubai office, tells Banker Middle East of his projections and the importance of taking a proactive stance in trying times
Bhavin Shah
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With everything that is currently going on, what is your outlook on this market for 2020?
Given the grave situation regarding the COVID-19 virus, I believe that it is only fair that we discuss the potential impact of this health crisis on the economy and government measures directed at it. The crisis, declared by the WHO as a pandemic, has already caused the slowing down of several global economies.
The US stock market has been sent into a bear state. Trade across the globe is expected to be hit hard; the Middle East is no exception. For the region, the outbreak of the virus could lead to reduced borrowing and lending. In response to this, governments and central banks all over the world have enacted fiscal and monetary stimulus measures to counteract the disruption.
The Central Bank of the UAE has announced a comprehensive AED100 billion stimulus package to help retail customers and corporates overcome financial constraints. The Targeted Economic Support Scheme consists of AED50 billion from the Central Bank funds through collateralised loans at zero cost to all banks operating in the UAE and of AED50 billion funds freed up from banks' capital buffers. These measures are aimed at helping retail and corporate customers in tough times and will enter into force with immediate effect. Plethora of other initiatives are being taken by the Central Bank to ease the burden on consumers.
While we may discuss the outlook for banking and financial services, we must always remember that the severity of the impact of this pandemic will determine the validity of these outlooks and opinions.
What are your views on the banking and finance sector in this region?
The evolution of financial services in the region has arguably been slow and painful over the last decade. Changing customer preferences, aggressive rivals cornering market shares and the regulatory environment have necessitated
enormous strides. Looking ahead to this year, global and regional economic uncertainty signals challenging times for the region's banks. Increasing cost of funds, rates cuts by the Fed, rising non-performing assets, financial crime, cyberrisk and many more factors will pose a threat for GCC banks.
We believe that such an environment can provide many opportunities as well. Awareness of these issues coupled with counter innovative strategies, agility, and careful planning can lead banks to better than expected performances. According to our view, taking a proactive rather than reactive stance will be the most important distinguishing factor for a superb leadership performance.
All in all, it is safe to say that certain trends are dominating banking in the region:
An overbanked region
The effects of an overbanked population have recently started to become visible. In the midst of unfavourable economic conditions, smaller banks have suffered more than their larger peers and have struggled to remain liquid. The downward trend in real estate prices has resulted in a decrease in asset quality for these small banks. Consequentially, a wave of consolidation has swept the banking industry. This enables the industry to eliminate excess capacity in the medium run.
Technological disruption
Even though banks in the region have lagged in this regard compared to global peers, heavy investment has been made in efforts to digitalise product and service offerings. Collaboration between start-ups and established financial institutions is the way forward to drive innovation in the region.
Financial inclusion
Recent data suggests that the region has seen increased financial inclusion. However, gender and youth inclusion remain important issues to be further discussed and improved
Islamic finance
The region has witnessed a growth of managed Islamic assets with Shari'ah-compliant product offerings on the rise. For example, DIFC recorded a 45 per cent growth between Q2 2018 and Q2 2019.
Where do the main challenges lie? Macroeconomic conditions
2019 was a turbulent year, to say the least. And we have started 2020 with dangers looming of potentially the biggest pandemic the world has ever seen. This is coupled with a great degree of rising political uncertainty and subdued economic performance. Falling oil prices will likely have a major impact on banking not directly but because funding for most banks in the region comes from the state or state own funds, which are heavily dependent on oil revenues.
Two-fold competition
Fintech players and foreign banks are proving fierce competitors for traditional banks in the region. The advent of technology driven ecosystems and products is likely to induce structural level change discussions for banking in the region.
— Bhavin Shah
Independence of banks
This is an important factor to ensure sustainability of banks. Banks in the region are often used by governments as tools to serve ulterior purposes. For instance, in Bahrain, retail banks' loans and exposure to the government have been close to 30 per cent in recent years.
Reduced profitability
Possible rates cuts and increased provisioning on bad loans (due to a decreasing asset quality) are likely to eat into the profits of banks in the region.
Where do you see opportunities?
Despite the various challenges and the grim macroeconomic view, there exist silver linings for banking in the region.
Technological disruption in financial services is being driven by fintechs. This is an opportunity for traditional banks to collaborate and devise ways to move ahead. An atmosphere of collaboration and partnerships can already be seen evolving. For example, Emirates NBD partnered with DIFC Fintech Hive to enable select fintech start-ups to use their API sandbox to co-create and innovate customer centric solutions. Such partnerships enable the development of superior intelligence and hence, better products and processes.
SME financing is also an area of opportunity. Regional governments have identified the need to increase SME contribution to GDP for their economies. The governments have included SME support as part of their national transformation agendas. For example, Monshaat in KSA and the National programme for SMEs in UAE. This translates into an opportunity for banks to make available the correct products for the sector to capitalise on the expected lending.
