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Consolidation, digital transformation, headline UAE’s banking sector moving forward

By KPMG:  GCC listed banks’ results, Embracing digital, end 2018

UAE

There are 49 banks under the auspices of the Central Bank of the United Arab Emirates' (CBUAE), of which 27 are foreign banks, 22 are national banks and seven are local banks that follow Shari'a principles.

For the top 10 listed local banks, gross assets increased by 7.9% year-on-year to $623.8 billion in 2018. CAR reduced from 18.7% to 17.3% mainly due to the adoption of Basel III and IFRS 9. The LDR decreased slightly; however the overall liquidity position of the market seems steady. NPL ratio decreased to 3.1% from 4.3% in 2017 due to several banks writing off bad book loans in a clean up exercise.

The banking sector in UAE ended 2018 with stable results with a focus on tight underwriting standards for credit initiation to manage provisions and to improve efficiencies within an operating model to reduce cost. — As per latest World Economic Outlook, the IMF predicted that the UAE's real GDP grew 1.7% in 2018 but the growth will pick up to 2.8% in 2019 and 3.3% in 2020. This prediction is lower than its October 2018 forecast when IMF had projected 2.9% growth for 2018 and 3.7% for 2019.

Consolidation and merger — Currently, the UAE is overbanked for the current population as both retail and commercial banking customers in the UAE have a wealth of choice, ranging from international and local lenders, specialist and commercial banks, and private banks. Hence consolidation in the UAE's overbanked industry has accelerated, compelled largely by a tougher operating environment, owing to oil price volatility and growing competition from fintech firms, not just in the UAE, but in many countries globally. The recent merger between FGB and NBAD was one of the largest banking mergers in the GCC.

Rightsizing the sector — More consolidation in the financial services sector, mainly among banks, is likely during the 2019–23 forecast period given the moderate economic growth. This will be driven by the higher cost of doing business in the UAE and the threat of new entrants disrupting the market. Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank (all of which are based in Abu Dhabi) successfully merged in April 2019.

Automated know your customer (KYC) in a blockchain environment — KYC is currently a pressing concern for banks and financial institutions throughout the world. Procedures often tend to be performed using traditional and outdated checklists with low quality data – albeit using centralized systems which are in fact fast and effective platforms. To resolve these concerns, banks are considering using blockchain technology to perform KYCs and address onboarding inefficiencies.

Robotics in banks One of the leading banking groups in the region is introducing 'Pepper', an artificial intelligence robot that is purported to add a ‘fun’ element to customer engagement. Pepper will interact with customers to understand visitation needs and present products and services alternatives in an engaging way, assisted by the bank's staff.

Digital transformation and reduction in physical branches across all services One of the leading banks in the UAE is poised to continue its digital transformation journey by extending the use of internet, mobile solutions, social media, artificial intelligence and robotics in a much wider range of banking functions. Extensive use of new generation machines such as automated teller machines (ATMs), cheque deposit machines (CDMs), and mobile apps was successful in revolutionizing service delivery through digital and automated channels. With the introduction of these machines, banks were able to increase the share of automated transactions and initiate the process of closing 50.0 percent of their physical branches.