UAE lenders sitting pretty

The country’s banks have largely recovered from the credit crisis and, with a booming property and tourism sector, the outlook is bright. However, upcoming local and global rule changes will be a challenge, Tom Arnold reports.

Left to right, Austin Rudman, a KPMG partner in Dubai, and Bill Michael, the regional head of financial services at KPMG in London. Sarah Dea / The National

More than four years on from a debt crisis that hampered their earnings, UAE banks have for the most part rebounded to stronger health.

Still, the latest challenges they face relate to combating money laundering and complying with new global and local rule changes.

Here, Bill Michael, the regional head of financial services at KPMG in London, and Austin Rudman, a partner in Dubai at the professional services company, talk about state of the banking industry.

How would you assess the health of the financial system in the UAE?

Mr Michael: It clearly went through some tough times, like everywhere else during the crisis. A lot of companies were not immune to the fundamentals of the crisis, so a lot of them have some significant workouts to get through. It sounds like some have broken the back of their legacy assets but others have a lot of work to do. There’s still repairing of balance sheets to do but they have some fantastic tailwinds buoyed by some steady growth rates, property rebounding in specific areas, trade corridors and tourism improving.

You have met with the Central Bank and other financial regulators during your visit to the GCC. What have you been talking about with them?

Mr Michael: The broad topics are what’s happening in Europe and what might be coming around the corner for this region. In Europe, pretty big issues relate to conduct risk and the way banks behave and treat their customers. That’s a real dominant issue. So all the mis-selling reviews which have dominated the United Kingdom – swaps mis-selling in the corporate SME world, the payment protection mis-selling in the retail world, credit card protection – they’re all products people will be familiar with here and regulators are looking to see what lessons can be learnt here. Conduct in wholesale banking is something the world is worried about, not just specific geographies, and you will have read about the investigations going on in the UK into foreign exchange practices across major banks. Foreign exchange is the most liquid market globally and, if what we’re hearing is right – that a lot of this has occurred post-Libor scandal, we have to ask whether banks are not doing things in the interests of their customers. Therefore it has the potential to be far, far worse and could have an effect everywhere and on how the foreign exchange market is regulated.

Are local regulators looking at these issues?

Mr Rudman: The conduct issues not so much as that’s further forward but whatever happens in the western region usually has some effect here, eventually. The Central Bank is looking around capital adequacy in general and the difference between regulatory environments as some of the banks that are domiciled here expand overseas. Broadly, everyone is keeping an eye on sanctions and anti-money laundering, where there’s a lot of work being done so far. The economy is looking strong after a good 2013 and the projection for the next few years is between 4 and 5 per cent, so the Central Bank is keeping an eye on lending, particularly to the property sector, mindful that we have had a rebound in the property market.

Banks are preparing to comply with the latest Basel III banking rules designed to beef up their resilience to financial shocks. How well placed are banks in the UAE to comply?

Mr Rudman: Banks are well placed with capital adequacy locally of 17 per cent. Although, we’re waiting to see what the final requirement for Basel III will be. It’s a moving target as they’re all starting from a different starting point. It will be a constant state of change.

What else is exercising the minds of bank chiefs in the region?

Mr Michael: There’s a lot of discussion about KYC [know your customer]. In this region there’s a lot more politically exposed persons and that has created a lot of pressure on foreign banks in terms of deleveraging and reducing cost pressures. Some of them have had to pull out of the region and others have had to stop funding embassies and stop funding certain areas. A lot of this is as a result of the global pressure they’re under but it has a local consequence.

Do you see any effect on this region from the recent instability in Ukraine and Russia?

Mr Michael: We’ve discussed this more in Europe – the movement of money and economic insight. But as an outsider what strikes me about Dubai in particular and Abu Dhabi is that they’re anti-fragile cities, so where there is disorder elsewhere they get stronger. These cities are anti-fragile for instability in the broader world, not just the regional world. It wouldn’t surprise me if there was a lot of Ukrainian money flowing in. We’ve seen Dubai’s safe haven status already bolstered by the Arab Spring.