Arthur D. Little (ADL) has published a new Viewpoint exploring challenges and opportunities that illustrate the lasting and even increasing importance of the corporate segment for banks in the United Arab Emirates (UAE).
The ADL Viewpoint, Pursuing Excellence in Corporate Banking, reviews the impacts of recent disruptions and expected, and explores options for banks to strengthen and grow their corporate and investment banking (CIB) business.
CIB in the UAE represents close to $635billion. assets and $15billion. revenue. CIB assets are around five times the ones of retail banking. According to the report, regional banks however focus their external communication primarily on the consumer segment, whether it is fintech, strategy, digital transformation, products, or applications.
Further, corporate banking is often perceived as a specialist area and, as a result, innovation is frequently thought to be focused in the retail banking sector. The report outlines an increasingly competitive, fast-evolving, and complex environment for CIB businesses, which includes a variety of challenges caused by structural trends, covid-19, and the war in Ukraine.
ADL Viewpoint calls for the primary focus to return to corporate banking for a few important reasons – an inflationary storm is ahead and CIB will be critically exposed to it and CIB is heavily impacted by environmental, social, and governance (ESG) efforts. While the retail segment is more competitive, CIB still benefits from several growth drivers.
Anticipating further sector consolidation
Clients are facing increasingly complex issues that require new solutions from banks. In addition, the SME segment remains underpenetrated. The potential of digital optimisation remains mostly untapped as well, and sizable innovation opportunities exist in the space of blockchain and cryptocurrencies.
Philippe DeBacker, managing partner and global head of financial services, Arthur D. Little, said: “The region offers a positive and transformational environment for corporate and investment banking, which accounts for about 70 per cent of assets in the GCC amid high hopes for the economy and enormous private and public sector spending.
“As highlighted in the Viewpoint, banks should anticipate further sector consolidation due to shrinking margins and high regulatory requirements. To accelerate their journey to becoming banks of the future, banks need to redesign their business models to maximise revenue per customer, protect capital and ensure risk resilience by optimising the use of financial technology.”
Stephane Ulcakar, associate director and head of corporate and government financial services, Arthur D. Little, said: “The digital transformation trend has caused widespread disintermediation and the need for scale across industries. As a result, banks must transform in much the same way that car manufacturers — and many other industries — did during the 20th century.
“This means moving away from an integrated model and outsourcing most value steps except a few strategic ones, such as design, assembly, and control. In response to these disruptive forces, however, banks have an unprecedented chance to broaden their business, reduce costs, and become more reactive. However, as was true with car manufacturing, this can lead to additional challenges.”
Developing a sustainable business model
According to the report, there are four common imperatives for banks to be aware of:
- Banks must rebalance their portfolios based on diversification, return, and risk targets, and monitor those at client level. They must also anticipate balance sheet cleanup, impact on tier-one capital, and develop treasury and liquidity management capabilities.
- Banks must maximise revenue per customer by spotting all opportunities for (re)activation and retention, cross/upselling, and pricing realisation. They must also consider variable rates and facility nonusage penalties to reflect the upward rate trends.
- Banks should engage clients beyond credit, with distressed M&As, debt capital market (DCM), or ESG transformation financing. They must be ready to increase their nonperforming loan and restructuring management. Sectorial specialisation will be required to properly assess needs and risk level.
- Banks should work on simplifying their organisations, their products and the activities they carry out. Reducing their share of fixed costs requires the use of digital tools to optimise, automatise, and/or outsource part of the value chain, either to suppliers or to shared utilities.
At the same time, successful CIB strategies must leverage the bank’s core assets and capabilities to create a differentiated and viable positioning.
Anticipating a new paradigm for CIB in the GCC
The digital transformation trend has caused widespread disintermediation and the need for scale across industries. In response to these disruptive forces, however, banks have an unprecedented chance to broaden their business, reduce costs, and become more reactive.
As explored in the Viewpoint, with the strong hindsight of local regulators, the multiplication of banking accelerators for start-ups, and the rapid development of the fintech ecosystem, it is clear that the UAE CIB sector is poised to quickly integrate these new trends and successfully adapt them to the specifics of the local markets.