UAE banks to continue to digitise in cost cutting push, Alvarez & Marsal says

Large lenders will increasingly reduce their dependence on traditional branch networks as they embrace technology

Banks will continue to digitise as customers are less interested in visiting branches. Pawan Singh / The National

Banks in UAE will continue to pivot to digitisation, cutting reliance on traditional brick-and-mortar infrastructure to gain new customers as they look to control costs in changing industry dynamics, consultancy Alvarez & Marsal said.

UAE lenders are mimicking their peers in Europe, where large financial institutions have gained more customers through their neo-banks -- digital lenders without physical presence – than they have managed to gain through traditional branch networks, said Saeeda Jaffar, managing director and co-head of Middle operations at A&M on Monday.

Dubai-based lender Mashreq Bank has explicitly said it intends to reduce its conventional branches by half in the UAE but there are other large banking institutions that are also pursuing the same path, she noted.

“Mashreq is the first one to very openly say that [it will close branches] but if I look at the other large banks, there have been branch closures….. we have seen this happen, perhaps [it will happen] a little bit more organically and softly in the UAE market,” she said.

“Do we think this will continue? Yes. This is a natural trend as customers choose not to go to a branch …. and that’s something the banks will have to cater to.”

Mashreq Bank, the lender controlled by the Al Ghurair family, will spend at least Dh500 million over the next five years on digitisation, as it plans to shut half of its branches in the UAE this year. It will replace the physical infrastructure with digital "branches", its chief executive Abdul Aziz Al Ghurair told The National in an interview last week.

The remaining branches will still remain operational and Mashreq, which currently executes about 97 per cent of its processes online, will later review their viability, he said at the time.

A&M supports the strategy of maintaining part of a bank’s physical infrastructure and Ms Jaffar said the role of a branch will change as it will become a component in a much more digital universe of a bank.

“Branches will not die [entirely],” she said, adding that they will still operate with an increasingly digital makeup.

Mashreq’s strategy is in line with a growing trend in the financial industry as large branch networks are expensive to operate and maintain.

Emirates NBD, Dubai’s largest lender, is spending more than Dh1 billion on digitisation, while National Bank of Fujairah is also boosting investment in technology, its chief executive Vince Cook said earlier this month.

Aside from their digital pivot, lenders in the UAE will continue to focus on expanding the size of their wallet and increasing non interest income this year. The net interest margins, which faced headwinds in the fourth quarter of last year, will continue to be under pressure in 2019, Ms Jaffar said, outlining the performance of UAE’s 10 biggest banks in A&M’s UAE Q4 Banking Pulse report.

Loans and advances for lenders grew at a slower rate (0.73 per cent) than deposits (1.98 per cent) leading to a reduction in loans-to-deposit ratio of 100 basis points, according the report which uses independently-sourced and published bank data for analysis.

“[Although] the growth of deposits, loans and advances has slowed ….. [there’s] reasonable amount of liquidity in the market,” she said. “There are several good opportunities [of growth] to capitalise on. Banks this year will have to demonstrate a degree of discipline, as well as tighten their due diligence as we still expect them to face headwinds.”