In what ways has Covid-19 affected asset quality and profitability in the banking sector, and to what extent are stimulus measures by the UAE government facilitating recovery?
AHMAD ABU EIDEH: Covid-19 had an effect across all sectors of the economy and the full extent of its impact will only unfold as more data becomes available. So far, the economy has been in a reactive stage rather than a proactive one, as evidenced by layoffs in several industries and the contraction of business activity, particularly in the hospitality and retail sectors. However, not all areas of the economy have been negatively impacted.
The banking sector mirrors the wider economy and profitability is derived from the economic activity of our customers. In the case of the UAE, the full impact of the Covid-19 outbreak has been cushioned by the government stimulus measures, which were announced and executed earlier here than in other Gulf countries. Whether the Central Bank of the UAE´s Targeted Economic Support Scheme (TESS) or Sharjah’s stimulus package, these measures have provided substantial support to retail and corporate customers, particularly by allowing loan instalment deferments in addition to wider government support initiatives like reducing business fees or waiving some taxes to affected sectors. As a result of this government support, the UAE banking sector has remained quite resilient and committed to the local economy, in spite of multiple economic shocks.
How are banks aligning their credit requirements with the needs of businesses and customers affected by Covid-19?
ABU EIDEH: Not every customer can provide proof of being impacted by Covid-19 and therefore cannot be included as part of TESS. However, banks are also evaluating clients on an individual basis to award deferment mechanisms, assistance on how to settle loans or provide any other aid to non-TESS clients, whether retail or corporate. Banks have maintained lending to bankable business deals and continued to support the local economy. However, due to uncertainty in the economic environment, banks have to be extra careful in assessing financing projects.
On the bright side, some businesses or industries have only been minimally impacted by Covid-19 and therefore do not require any stimulus support. Whereas small and medium-sized enterprises have been more impacted, some segments like financial technology (fintech) or ICT-related companies have thrived. Banks continuously perform financial analysis and assess lending schemes for small businesses, which have been impacted the most in this regard. While banks remain committed to channelling funds to all segments of the local economy, vigilance is always required as we are custodians to the money of depositors and lending must be subject to stringent risk analysis.
In which ways is digitalisation being harnessed to strengthen the banking ecosystem and deliver an integrated experience for customers amid lockdowns and social distancing restrictions?
ABU EIDEH: Organisations that had already embarked on a digital journey faced much less disruption during Covid-19 than those that had not yet embraced digital transformation. Inevitably, there will be a greater drive towards digitalisation and automation across all industries after the pandemic, with fintech receiving increasingly more attention. Organisations behind the digitalisation drive now understand how essential it is to make these investments and the banking sector sees where it needs to head in terms of digital and mobile performance. Indeed, businesses that do not embrace digitalisation risk becoming obsolete. The digitalisation journey comes with risks as well, leading banks to continue reviewing their security protocols and reinforcing any weaknesses so as to reduce vulnerability to cyberattacks.
A major trend impacting the banking sector is the growth of digital banking, which despite not being significant players in the industry a few years ago, have now grown considerably, driven by a younger population that is increasingly more comfortable with fully utilising digital platforms. The digital bank environment allows every step of banking service to be done online, from opening an account to accessing financial products, and these are being adopted at a high rate by the local market. Similarly, banks allow for a low-cost base and high efficiency services, which drive conventional banks to be more competitive.
What do ongoing mergers signal about the trajectory of the local banking sector?
ABU EIDEH: There has been a trend towards mergers in the banking sector across the Middle East as organisations recognise the benefits from larger operations, economies of scale and deeper funding. Although some disadvantages also exist – like losing touch with smaller customers – a bigger size awards banks the ability to better withstand market volatility and streamline their operations. Prior to merging, banks should identify institutions that offer them synergies to determine the successful integration of work cultures, systems and people.
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