Emirates

Corporates and SMEs – the banking landscape going forward

Corporates and SMEs – the banking landscape going forward

he Banking, Financial Services & Insurance (BFSI) focus group was established to bring to IBPC members the latest developments in these sectors and create awareness of issues that affect businesses and professionals alike. The focus group has anchored numerous, well-attended events on a variety of subjects, ranging from the effects of a credit crunch in the UAE to investment opportunities in India. We strive to maintain contemporary relevance and practical usefulness of all our events and welcome suggestions for improvement.

Perhaps the most singular and critical developments in our sphere of coverage are those in the world of banking in the UAE, which is changing at a pace we have not seen, at least during the 26 years I have spent in Dubai. This is particularly pertinent to both businesses and banking professionals. Some signal developments in the recent past are discussed below.

Effects of bank mergers

The first is the spate of bank mergers in the UAE and the effect this will have on borrowers. A highly likely outcome is that the merged entities are likely to review their credit portfolios carefully and reduce exposures to corporates to which both pre-merger entities had lent. The larger the merged bank, the more they will be under scrutiny and therefore are likely to become more stringent vis-a-vis credit and AML risks. Their international presence and the increasing stridency of US regulators are bound to exacerbate this. These trends will affect corporate and retail borrowers with account opening, performance of routine transactions and borrowing monies, all coming under even more intense oversight.

The lesser the number of banks, the lesser the choices. One must also be seized of the fact that no more than 7 – 8 banks alone control over 75 per cent of all bank assets and liabilities in the UAE. This ratio will become even more perverse with more mergers. There is an obvious lesson in all this.

Mergers are expected to bring meaningful cost-savings, therefore the implications for banking professionals are incontrovertible and obvious.

The second is the effect of the new IFRS 9 accounting regulations that banks have started adhering to. The ramifications for corporate borrowers are far-reaching.

The how and why of this merits deep examination, but suffice it to say that the two most vital consequences will be a) the average cost of credit (not the cost of funds) will rise; and b) borrower discipline will be severely enforced by banks. In other words, borrowing will become more expensive and banks will get tougher.

The inference for borrowers is clear. Businesses, both small and large, need to think long and hard about their financing strategies and their approach to banking. Clear strategies with regard to borrowing dependencies, funding tenor mismatches, credit buffers and alternative sources of financing are some of the imperative issues that need to be urgently addressed.

Some of the more farsighted larger businesses have already begun to pay attention to the new trends, which are a far cry from the days of easy and plentiful credit in the years leading up to 2016. Those days are simply never going to return.