Outlook For The Banking Sector To Remain Stable In Light Of Economic Recovery
Abdul Aziz Al Ghurair, Chairman of Mashreq Bank, believes the future performance of the Middle East’s banking sector is promising. Here’s why.
There is enough reason to suggest that growth in the banking sector will remain stable in the immediate future, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability, and solid funding. In addition, banks in the region have taken the opportunity to transition to IFRS 9 to recognize the effect of a slower economic cycle on the asset quality. While these are all positive signs for the banking industry, it would be unwise to assume that there are no challenges on the horizon. Among the two main factors that have curbed banking growth is the overall weak macro-economic scenario and the lack of consumer confidence (and, thus, related spending).
While GCC economies are expected to show slightly stronger economic growth in 2020 following a dip in 2019, the growth will be much lower compared to the cycle when oil prices were above $100. Also, the interest rate cuts will have impact on the net revenues of banks as they will cause erosion in their net interest margins on the back of lower asset yields.
So, the big question is: how do banks mitigate these factors and lower risk to counter the impact on profitability? As banks in the region continue to look at the digitalization of their processes and products to improve efficiencies, external factors will also positively impact their prospects.
From a regulatory perspective, the risk management framework and the new corporate governance framework issued by the U.A.E government in 2019 will help. The latter introduces sector-wide policies in line with international best practices, which state that independent directors must be included in the composition of banks’ boards and mandatory committees along with other relevant policies.
Another upside is the ongoing consolidation and merger of major banks. Greater consolidation will enable cost efficiencies through the reduction of operational expenses. The money that is thus conserved can then be channeled towards improving and delivering better banking products. Not only are these mergers and acquisitions beneficial for the bottom line and growth, but they can also improve the geographic diversification of banks. Merger and acquisition deals across all industries within the Gulf amounted to $33.7 billion last year—the highest since 2007, before the financial crisis hit. There will likely be more mergers and acquisitions in the region over the next five years.
Another reason to be optimistic about the banking sector’s performance next year is the Expo 2020. The event is expected to have a substantial economic impact for both Dubai and the U.A.E. The inflow of people and the influx of development work as a result of the Expo (and leading up to the event) will trigger financing opportunities for banks. Similarly, if the event is able to attract further migration to the U.A.E., then an increased customer base means an increase in demand for banking services. That being said, this expected surge needs to be translated into sustainable growth.
These are interesting times in the banking sector, with tech companies causing a major disruption in the industry. Banks need to be wary of fintech and bigtech players in the market. Their focus needs to shift to improving the customer experience through digital transformation. This is an area that will determine which players will remain relevant in the future given the tumultuous economic climate.