Digital transformation and compliance to boost banks profitability

Financial institutions that leverage technology and data to deliver fully integrated services may be in a better position to drive business growth and overcome disruption caused by the global COVID-19 pandemic, according to KPMG’s fifth annual UAE Banking Perspectives report.

Abbas Basrai, Partner and Head of Financial Services, KPMG Lower Gulf

The report found that rapidly evolving customer expectations and increasing regulatory scrutiny are putting pressure on UAE banks to modernize every facet of their operations. Many are structuring their businesses in new and exciting ways and are recognizing customer experience as a source of commercial value rather than as a differentiator versus their competition.

The report also observed a healthy trend of increasing banking profitability over the past three years, with total growth of 13.9% in net profit among the top ten UAE banks in FY2019. The primary reason appears to be stronger non-interest income performance and certain one-off events, with revenues flowing in from fee income and lower credit provisioning. The initial conservative view that was widespread when IFRS 9 was implemented is also gradually disappearing.

Looking ahead, the report states that UAE banks will have to closely examine their business continuity plans (BCP), in light of the current Covid-19 threat. The Central Bank of the UAE (CBUAE) has been proactive in rolling out stimulus packages and has announced a comprehensive AED 256 billion. ‘Targeted Economic Support Scheme’ to contain the repercussions of the pandemic.

The CBUAE is also allowing banks to free up their regulatory capital buffers to boost lending capacity and support the UAE economy. Furthermore, all banks operating in the UAE will have access to loans and advances extended at zero cost against collateral by the CBUAE.

“The CBUAE has been very supportive of the financial services sector in light of the disruption caused by the pandemic,” said Abbas Basrai, Partner and Head of Financial Services, KPMG Lower Gulf. “But the banking sector may have to rely on a combination of external support and internal resilience-building to emerge unscathed. Digital transformation and regulatory compliance are likely to play a pivotal role in enabling banks to navigate the challenges that lie ahead.”

The report showed that banks are increasingly exploring the concept of ‘banking the ecosystem’, which is an interconnected set of services, where customers can fulfill a variety of needs in a single integrated experience. This integration of services may represent the cornerstone of digital banking in the years to come, creating a differentiated experience that can improve customer satisfaction, increase loyalty and generate additional revenue streams.

The report discusses how robust corporate governance and effective talent management in the context of rapid digitalization can result in jobs across the financial sector being re-shaped. Cybersecurity continues to emerge as a priority for UAE banks, with the report pointing out that progressive banks are integrating information-security risk management processes with the enterprise risk management framework, and are also using third parties to facilitate technology implementation, in an effort to decrease costs, improve customer experience, and enhance their competitive edge.

UAE banks are also embracing blockchain, which can offer benefits, including enhanced operational efficiencies, reduction of intermediary costs, and a culture of transparency — without the traditional potential risk of inaccurate information transfer.

“Banks and other financial institutions are faced with tough times ahead, but technology can help mitigate negative effects for customers and business,” said Basrai. “Banks that effectively leverage their digital assets, bolster cyber resilience and manage third-party risks will likely reap the benefits of increased revenue streams, regulatory compliance and enhanced operational efficiency.”