Dubai: UAE banks, especially banks with large retail industries, are heading for more redundancies as businesses shrink rapidly and margins become thinner, according to sources in the banking industry. Last month, the Emirates NBD reduced 800 people in one day. Sources in the bank said the numbers could climb further in the second half of the year.

While ADCB laid off 400 people this month, a few other smaller banks have also quietly applied the performance and branch closure. It is understood that two medium-sized banks will have to close seven and nine branches respectively in the current quarter.

Why Shrink?
Difficult operating environment caused by COVID-19, leading to a sharp drop in business, a squeeze on interest income from low interest rate environment, rapid adoption of digital solutions, impairment of loans and shrinking loan demand are forcing many banks to change their business models to reconsider.

In the second quarter of 2020, bank profits saw a large increase in restructuring and impairment of loans, and in some cases profits fell to 45 percent annually. Major banks such as First Abu Dhabi Bank, Emirates NBD and Dubai Islamic Bank declined 25 percent in the first half of 2020.

Abu Dhabi Commercial Bank (ADCB) achieved a 48 percent decline in the first half of 2020, driven primarily by declines in value related to NMC, Finablr and their associates. ADCB reported impairment costs of Dh2.55 billion in the first half of 2020, at 117 percent compared to Dh1.17 billion in the same period last year.

“This is an extremely challenging environment and we are being forced to abandon some of our people and branches because we do not see a sharp upsurge in business to support the level of operations we have had before,” he said. the retail bank head of a local bank.

Shrinking Loan Demand
The UAE saw a decrease in the credit appetite for both business loans and personal loans during the second quarter of 2020, according to the second quarter of the credit sentiment survey by the UAE Central Bank.

The results of the survey showed that the credit demand of companies and small businesses showed a decrease, with more than half of the respondents (53 percent), judging that the demand decreased significantly or moderately. Nearly a quarter of respondents see no change in demand, while 22 percent have a moderate or significant increase in demand.

Details on the corporate demand for credit showed that demand decreased in all categories for corporate lender except government-related entities (GREs), where it showed a slight increase.

Covid-19 was seen as the main reason for the decline in demand for personal loans and the tightening of credit standards. The trend is generally the same for all categories of personal loans such as personal loans, car loans, mortgage loans and credit cards. The main explanation for the reduced demand in the second quarter was the unfavorable change in income, which was mainly driven by job losses in the private sector, but the outlook for the housing market and the financial market also contributed.

Withdrawal of Credit Standards
An increased risk of defaults by both small and medium-sized enterprises (SMEs) and retailers has seen some banks decline in these segments.

Although many banks are expected to provide strategic allocation to corporate lenders and large tax lenders, bank quality is becoming a major concern for banks, forcing them to tighten credit standards.

According to the latest credit sentiment survey, 38.5 percent of respondents said that there was no change in credit standards for companies, while 37.6 percent said that their bank has tightened credit standards moderately, and 14.5 percent answered that the sharpening was significant.

Also in the personal lending space, 47.4 per cent of bankers reported a moderate tightening of credit standards, while only 9.5 per cent reported the significant tightening of 40 per cent, observed no change in credit standards.

Focus on cost reductions to continue Weak lending growth and declining asset quality, coupled with a margin strain due to the low interest rate environment, are forcing banks to reduce their costs. In operating costs, personnel costs are one of the most important components. In 2019, the United Arab Emirates banks cut nearly 1,000 jobs, mainly due to the consolidation in the banking sector through bank mergers. A recent report by the central bank showed that the number of employees in national and foreign banks decreased by 36,648 employees by the end of the second quarter of 2019 to 35,518 employees by the end of the third quarter of 2019.

Digital transformation and the use of technology also helps banks to reduce the number of branches and persons, while some leading banks such as Emirates NBD and Abu Dhabi Commercial Bank implemented significant job cuts last month, many others reduce the number of persons in different departments. The UAE’s banking sector is expected to experience a bumpy ride in the third quarter, with earnings in the second quarter reflecting the impact of COVID-19 on asset growth, asset quality and profitability.

The abolition of operating costs remains the main focus area for UAE banks in the next few quarters to halt the sharp decline in asset growth and profits and rising defaults (NPLs). In response to the slowdown in economies, most banks began cost-cutting measures before COVID-19 became a global pandemic. During the first quarter of 2020, the C / I ratio between top 10 UAE banks improved by 110 bps, after rising for the previous quarters. The lower C / I ratio was reported due to the reduction of staff costs associated with marketing costs by 6.8. The decrease in expenses was mainly due to the austerity measures taken by the banks, as eight out of ten banks reduced their expenses.

Source: emirati.news