The UAE’s banks are increasingly sharing information in a bid to prevent losses incurred through SME owners skipping the country, according to the head of KPMG’s UAE head of financial services, Rajesh Prasad.
KPMG’s new UAE Banking Perspectives 2016 report found that the UAE’s 10 biggest listed banks grew profits by a combined 11 per cent last year, mainly due to a 9 per cent decline in impairment charges.
Overall, the ratio of non-performing loans on banks’ books dropped by 4.1 per cent, but the SME sector (which represents about 4 per cent of total loans and advances made by banks) was negatively affected by plunging commodities prices, tighter liquidity and cash flow struggles as payment periods from government-related entities lengthen.
This has led to more owners — particularly those in the commodities, food and beverage and construction subcontracting sectors – skipping the country, with the lack of a bankruptcy law cited as one reason why owners flee rather than try to negotiate with creditors.
Mr Prasad argued, however, that banks “have got together and are sharing information” to help SMEs restructure, rather than just concentrating on recovering their own loans.
“For example, if there is a customer who has exposure to four or five banks, these banks have got together, understood the collective exposure of the client and tried to help.”
The report pointed out that SMEs are a vital part of the UAE’s economy, generating 90 per cent of employment. Despite this, 50-70 per cent of SME loan applications are rejected, and the typical interest rates they pay on an unsecured loan is 15 per cent.
Mr Prasad said that the eventual extension of credit information from retail customers to SMEs and corporates will help banks to better understand risks, which should then influence loan acceptance rates and pricing.
Luke Ellyard, a partner in KPMG’s financial services sector, said that the biggest challenges facing UAE banks is the regulatory environment. The introduction of Basel III capital requirements and IFRS 9 — an accounting standard places the onus on banks to recognise expected future losses when making provisions, rather than just writing down assets based on current valuations.
“Those reforms [are] challenges, but also opportunities. The banks that deal with them most efficiently and effectively are the ones that will be best placed to succeed in the long run,” he said.
He said that although UAE banks have among the highest capital adequacy ratios in the world — at 18 per cent, they are considerably higher than the 12 per cent regulatory minimum — banks need to focus on the returns they achieve on equity to ensure that these are maintained.
“If you look at the some of the international banks, they are fundamentally looking at how their balance sheets are shaped. The sales of some assets being talked about from some UK and global banks are driven by new regulatory requirements. You need to have a viable strategic plan for every item in your balance sheet.”
A recent Boston Conulting Group report said that revenue and margins of GCC banks came under pressure in 2015 due to liquidity challenges and tightening margins. Revenue growth slowed to 7.2 per cent last year — three percentage points lower than in 2014. Operating profit growth slowed to 6.3 per cent, compared to 14.6 per cent a year earlier.
mfahy@thenational.ae
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