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.

Forbes Middle East - - TOP 100 BUSINESS TYCOONS -

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.

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