For banks, it’s a time to look within

The Pak Banker - - OPINION - Saeeda Jaf­far

ON all fronts, 2016 is set to be a chal­leng­ing year for banks, both in the UAE and re­gion­ally. Af­ter three years of ro­bust growth of 8-10 per cent across the sec­tor, 2016 is ex­pected to see both a slow­down in bor­row­ing, as well as dents to bank­ing prof­its. There will be growth op­por­tu­ni­ties - tak­ing ad­van­tage of Iran's re­con­nec­tion to the global econ­omy, for ex­am­ple - but the op­por­tu­ni­ties will be selec­tive and un­cer­tain, and the over­all en­vi­ron­ment will be tur­bu­lent. Re­cent head­lines sug­gest that many banks are be­ing proac­tive about the strong head­winds that they are fac­ing: an es­ti­mated 1,500 peo­ple have re­cently been laid off from the sec­tor lo­cally. Banks that put their houses in or­der dur­ing the cur­rent slow­down will emerge stronger, more re­silient and bet­ter po­si­tioned for growth than their com­peti­tors.

There are five key ques­tions that man­age­ment should be ask­ing when as­sess­ing whether they are tak­ing the nec­es­sary steps to get their house in or­der. Firstly, how suc­cess­ful is the bank at re­tain­ing cus­tomers and de­vel­op­ing loy­alty? His­tor­i­cally, banks in the re­gion have grown by at­tract­ing new cus­tomers. Given the high net pop­u­la­tion growth that the UAE has ex­pe­ri­enced over the last five years, this has been a vi­able strat­egy.

How­ever, with the rate of im­mi­gra­tion slow­ing from 21 to 13 mi­grants per 1,000 peo­ple, banks will ei­ther have to lure cus­tomers from other banks, or fo­cus on grow­ing busi­ness from ex­ist­ing cus­tomers. For ei­ther strat­egy to work, banks will have to make a shift from be­ing sales-led or­gan­i­sa­tions to be­ing cus­tomer ex­pe­ri­ence-led or­gan­i­sa­tions.

Through bet­ter re­la­tion­ship man­age­ment and de­vel­op­ing con­ve­nience bank­ing, in­sti­tu­tions can fo­cus on re­tain­ing and build­ing loy- alty in the cus­tomer base.

Se­condly, how cre­ative is the bank about man­ag­ing costs? In many ways, cut­ting costs will be tougher than de­vel­op­ing cus­tomer loy­alty: a lot of the low-hang­ing op­er­a­tional costs have al­ready been squeezed out of the sys­tem by stream­lin­ing pro­cure­ment, ra­tio­nal­is­ing IT, man­ag­ing real es­tate and driv­ing digi­ti­sa­tion. But be­fore fur­ther cut­ting head­count, banks should con­sider more cre­ative ways to achieve the next level of ef­fi­ciency. One ap­proach is to in­cen­tivise staff to iden­tify ad­di­tional value and drive cost re­duc­tions bot­tom-up across the or­gan­i­sa­tion. Banks com­ing out of a down­turn with an ex­pe­ri­enced, loyal work­force will inevitably be in a strong po­si­tion. Those that don't have that, won't be. An­other key ques­tion is whether the bank is fo­cused on ac­tively col­lab­o­rat­ing with clients in the man­age­ment of un­der­per­form­ing - and non-per­form­ing - as­sets? An es­ti­mated Dh50 bil­lion of loans are un­der­per­form­ing: a wor­ry­ing sign that not enough is be­ing done to re­struc­ture or rene­go­ti­ate debts.

In ad­di­tion to reg­u­larly re­view­ing and mak­ing ap­pro­pri­ate changes to their un­der­writ­ing po­lices, banks will have to shift their at­ti­tudes to­wards proac­tively part­ner­ing with clients to find work­able so­lu­tions to re­pay­ments, col­lab­o­rat­ing with their cor­po­rate clients to help ad­dress cash flow is­sues and of­fer­ing re­struc­tur­ing ser­vices. This will be es­pe­cially im­por­tant for banks with large SME and mid-mar­ket port­fo­lios, which is likely to be the most dis­tressed seg­ments. Fourthly, how se­ri­ously does the bank take com­pli­ance? By virtue of its geo­graphic prox­im­ity to at least six high-risk coun­tries in terms of do­ing busi­ness, UAE banks are un­der in­creas­ing pres­sure to strengthen their com­pli­ance prac­tices. In 2014, the value of the UAE's re­mit­tances was Dh106 bil­lion - and the ac­tual value of to­tal out­bound for­eign cur­rency was sig­nif­i­cantly larger.

In­volve­ment in th­ese cross-bor­der trans­ac­tions is at risk for lo­cal banks who are be­hind the curve on com­pli­ance, as global bank­ing in­sti­tu­tions de­mand that lo­cal part­ners meet ever higher anti-money laun­der­ing stan­dards. Fi­nally, does a risk-based cul­ture per­me­ate the bank, start­ing all the way at the top? Es­ti­mates sug­gest that banks lose around 1 per cent of their rev­enue - so close to Dh900 mil­lion in 2015 - to 'leak­age', in­clud­ing hu­man er­ror. Larger banks with ex­pan­sive branch net­works are far more prone to this than smaller banks, but cy­ber­crime is on the rise and threat­ens large and small in­sti­tu­tions alike. To ef­fec­tively com­bat th­ese op­er­a­tional risks, hav­ing the right pro­cesses, sys­tems and con­trols is vi­tal, but not enough. Cre­at­ing a risk-based cul­ture, through train­ing and re­tain­ing good peo­ple, while avoid­ing ad­versely af­fect­ing cus­tomer ex­pe­ri­ence, is the key to min­imis­ing losses. The UAE's banks have been here be­fore, in 2008-09, and the best al­ready have strong an­swers to th­ese ques­tions. They learnt from hard ex­pe­ri­ence.

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