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Grappling with pandemic-induced stress on businessesin the past year, as well ascontinuously evolving consumer behaviour, banks need to stay innovative and customer-focused, bolster back-end functions and remain vigilant in terms of governance and corporate culture – according to KPMG’s sixth annual UAE banking perspectives report.

The publication, which offers an analysis of the banking industry in the UAE, found that during 2020, net profit for the top 10 UAE banks dropped by 41%on average, compared with2019. This decrease, says the report, is due to the significant increase in the provision charge on loans, with banks expecting higher losses and customer defaults as a result of the pandemic. While banks’ capital and liquidity position remains strong, issues relating to counterparties’ creditworthiness and provisioning persist.

Abbas Basrai, Partner and Head of Financial Services, KPMG Lower Gulf, said: “With revenue pressure expected to continue in 2021, the only way banks are likely to maintain profit margins will be by strictly managing costs. Underlying this is the need to bolster back-end functions, which tend to be driven by people and paper, rather than merely focusing on what is visible to the customer. The imperative for strong IT infrastructure is more relevant than ever, as lockdowns have renderedeffective remote-working technology invaluable.”

The report underlines how banks are digitalizing complex processes and end-to-end customer journeys across the front, middle and back offices. Innovating and serving customers is at the forefront of disruption and change, which is supported by a delicate balancing act of the core and non-core functions while leveraging the cloud for operational resilience. None of this is possible without the right people and culture. Reimagining the employee journey therefore becomes imperative, with a focus on upskilling and reskilling employees through investment in learning and development.

Another important component that will improve both operational efficiency and business prospects will be addressing competition. With challengers quick to adopt innovative technologies, traditional banks need to chart a different route. According to Basrai, banks around the world increasingly find value in partnering with digital challenger banksand brokering their products in online marketplaces. The same can be replicated in the UAE. Instead of trying to imitate the way FinTech companies approach technology development, traditional banks may do well to capitalize on FinTech innovations by incorporating external products and services in their portfolio.

The report also highlights the key role robust regulatory compliance and governance play in transforming operational strategy. The publication highlights how over the last two years alone, local authorities have issued or revised many regulations to enhance financial stability, including the Corporate Governance and Risk Management regulations issued by the UAE Central Bank.

For statutory audit, another key element of corporate governance, the report recommends frequent bilateral (regulator and auditor) and trilateral meetings (including the bank) between parties to create a better understanding of the audit approach.

“Banks are witnessing a time replete with dissonances: great technological advancement tempered by the potentially catastrophic implications of the pandemic. Retaining customers will be crucial, and retention strategies can be supported with digital transformation drives. Banks should deliver on the promises they make to customers, ensure their experience is seamless, and fortify their control environment against the threats that abound,” said Basrai.

To read the full 2021 UAE Banking Perspectives report, please visit: https://home.kpmg/ae/en/home/insights/2021/03/uae-banking-perspectives-2021.html