UAE banking sector pivots to new resilience mechanisms to spur growth

The UAE’s financial services sector is poised for growth in 2022 amid sweeping economic and fiscal reforms on the back of improved infrastructure and digital trends.

The banking sector, following a remarkable rebound in 2021, is adopting new resilience mechanisms to counter the effects of the global pandemic, including digitalisation, enhanced regulatory frameworks, corporate governance and risk management strategies, according to analysts at KPMG UAE.

“The UAE banking sector has performed remarkably, despite prevailing financial and economic conditions. We believe banks have emerged stronger than ever after the economic slump brought about by the pandemic,” said Abbas Basrai, partner and head of Financial Services, KPMG Lower Gulf.

“To best serve the interests of all their stakeholders, financial institutions will do well to constantly adapt their operations and compliance functions to keep pace with the maturing regulatory landscape, become early adopters of nascent technologies, and embed environmental, social and governance (ESG) into all they do,” Basrai wrote in KPMG Banking Perspectives 2022 report, which analyses key trends and opportunities in the financial services industry.

The UAE banking sector, the most vibrant in the region, enjoyed a promising year against a backdrop of sweeping tax reforms, including UAE Corporate Tax announced this January and Global Minimum Tax announced in 2021.

The top 10 UAE banks reported a five per cent year-on-year increase in total assets worth Dh2.989 trillion in 2021, and an increase of 42 per cent in net profits. “This is mainly due to lower impairment charges, as banks had reported higher losses and customer defaults in the previous year because of the pandemic.”

A recent analysis by Alvarez & Marsal predicted that broader profitability of the banks would be driven by net-interest income (NII) growth this year following a hike in interest rates in tandem with the rate hikes by the US Federal Reserve.

Analysts at Moody’s and S&P also have shared this bullish outlook. Moody’s Investors Service analysts said the net profitability of banks in the UAE would be “driven by growth in net interest income, underpinned by rising interest rates expectations and strong business momentum supporting non-interest income, while provisioning efforts ease.”

After examining data of the 10 largest listed banks in the UAE, A&M’s UAE Banking Pulse noted that in 2021, the aggregate net income of the banks increased substantially by 48.6 per cent year-on-year to Dh37.8 billion, mainly driven by higher operating income (+5.2 per cent yoy) along with lower impairments (-30.1 per cent yoy).

KPMG analysts noted in their report that the capital position of the banking system remains strong and the overall liquidity position, cost-to-income ratio and return on equity of the market remained steady year-on-year.

The report also analysed key drivers of consumer satisfaction amongst major UAE banks, and found that one of the major pain points for consumers was a lack of efficient support for their reported issues relating to business conduct, which included suspected fraud and incorrect information being received. The ‘cryptofication’ of banks was also identified as a key trend in 2022, due to increased demand, supply, and banks not wanting to miss out on its adoption.

They noted that the banking sector is subject to mounting regulatory and stakeholder pressure to embed ESG considerations into operations.

“Financial institutions play a pivotal role in providing funding to combat climate change, challenge and incentivise ESG practices within their customer base, and support organisations as they work toward addressing the UN Sustainable Development Goals (SDGs).”

Other key trends shaping financial institutions are the implementation of cloud strategies, and outsourcing and offshoring of compliance, IT and other processes to meet the demand for quick and secure transactions.

“The typical customer is evolving, and banks need to move with the times. Clients with low amounts of investment capital now collectively form a key potential market. These individuals are looking for highly personalised advisory solutions from technologically sound advisors, and advanced platforms and features, to help them manage their family wealth and succession plans. Digitalisation has reduced client-retention costs and improved access to their capital. As a result, many banks are working on strengthening their wealth management businesses,” said the KPMG report.

— issacjohn@khaleejtimes.com