How can GCC Banks reset for growth beyond COVID-19?

Interview with Mr. M.R.Raghu, CEO, Marmore MENA Intelligence

How GCC banks reset for growth beyond the COVID-19 crisis?
The performance of the GCC banking sector had already started to get impacted before the coronavirus pandemic on account of global economic issues, however, the whole situation got exacerbated rapidly on account of the pandemic. For instance, UAE listed banks’ cumulative net income in 2020 witnessed the first negative growth in over 5 years, falling by 42% over 2019 on account of higher loan loss provisions, which grew by 68% over 2019, and falling interest incomes (-13%) and non-interest incomes (-16%) over the last year. Consumers’ behaviour has undergone a transformation with the quick adoption of digital banking and e-commerce during the pandemic. This trend is likely to extend beyond the pandemic and well into the future given the ease of access. Adoption of digital technologies, e-commerce and fintech could spur the utilization of internet banking, mobile banking and mobile wallets rather than physical cash and credit cards. This would present banks with the opportunity to collaborate with existing e-commerce and fintech players to provide additional benefits to customers.

How could the banks profitably serve SMEs?
In the GCC, SMEs constitute close to 90% of the total companies’ base. The sector has the potential to generate 22 million employment opportunities by 2022 in the region. The strategic importance of SMEs is apparent in some GCC states, with the UAE relying on SMEs for 53% of the national GDP and 60% of the employment. Marmore estimates that SMEs constitute around 89% of the total enterprises in Kuwait while employing 38.5% of the total workforce. Access to credit is one of the major concerns faced by SMEs in the region. SMEs suffer a lack of credit lines, with banks unwilling to lend to smaller businesses at a time of squeezed liquidity. Banks could work on deploying a customized framework to assess and segment SME customers and look at aspects beyond size and revenue and consider other aspects such as business model, sector potential, stage of business operations etc. to develop a holistic understanding of the SME. This would aid banks to offer services beyond traditional products and broaden the range of offerings. Automation and digitalization of the entire lending process – from pre-qualification, credit rating evaluation, underwriting and credit decisions – would allow to speed up the lending activities and shortening time-to-money. Credit Guarantees, like the one offered by the Abu Dhabi government, could also help banks in reducing the risks associated with SME lending.

Could Kuwait’s new Mortgage law infuse fresh life into home financing?
A new Mortgage Law has been proposed by the Central Bank of Kuwait which would allow local banks to provide mortgage loan to up to KD140,000 with the government bearing the interest for the first KD70,000 on behalf of the borrower. Under current circumstances, Kuwaiti newlyweds are eligible to receive housing loans from the government backed Kuwait Credit Bank to the tune of KD100,000 (split as KD70,000 cash and KD30,000 worth building materials at subsidized rates) with no interest. However, with housing prices in Kuwait among the highest in the world, coupled with low oil prices impacting Kuwait Credit Bank’s ability to finance such housing loans has opened up opportunities for local banks to fund such loans. The passage of the law could aid local banks to engage in a new sector with the risk partly being taken care of by the government. A larger loan size would also aid in creating more demand for real estate, potentially increasing the number of apartments for sale.

RoE has nearly halved for Kuwait banks since COVID-19. How could banks unearth value and boost their valuation?
Kuwaiti banks reported a 53% decline in cumulative net profits in 2020 over 2019 as per data provided by Refinitiv. This has been mainly due to the increase in provisions and impairment charges for bad loans caused by COVID-19’s disruption to the economy. As result, the aggregate Provision Coverage Ratio (PCR) for non-performing loans increased to 222% at the end of 2020, while the ratio of non-performing loans to total loans reached about 2%. Fitch Ratings, an international credit rating agency, revised the outlook for 11 Kuwaiti banks to Negative from Stable in Feb 2021. The rebound in oil prices and the eventual normalising of the economy due to vaccinations may see an improvement in bank’s performance in 2021. With relatively stronger balance sheets, and various measures adopted by the Central Bank in relaxing liquidity requirements could aid in banks getting back to normal with an improving economy. Adoption of digitization and partnering with fintech firms to avail digital services would also add value to customers. The banking sector could also witness consolidation to cut costs and address liquidity shortages in order to better safeguard itself from similar situations in the future.

How has Marmore helped Banks in the region?
Banking being the most important sector for any economy has been at the forefront of Marmore’s services. Since our inception, we have partnered with several Banks in the region and have provided unique services which caters to information/intelligence needs of these institutions. Some of the services and engagements with Banks includes providing timely sector research. These reports take a deep dive into different sectors and provide the required knowledge to Banks for decision making. We are very active on the consulting front as well, be it market intelligence requirements wherein we do a detailed competition mapping or a market penetration strategy to enter a new market, we continue to be preferred partners for Banks. We also support Banks with white labelled research, which is used to present the Bank’s opinion in the market. Marmore also helps banks by providing customized research on trends impacting the sector. For instance, Marmore produced an in-depth research on the adoption of Fintech in the region along with evaluating the ability of banks in adopting the recent advancements in Fintech. Marmore also produced a customized take on the status of SMEs in the region, analysing the current and possible future trends that could impact the SMEs and the potential impact on the banking sector. We take pride in associating ourselves with big brands in this segment.