It was very clear, that the decline in the economic activities caused by the Covid-19 pandemic has impacted the global and regional economies; and being one of the most important component of this economy, the negative effect also manifested on the banking sector، The banks have also been impacted by lower interest income due to reduction in benchmark interest rates and lower fees/commission income، During the initial period of the Covid-19 crisis, the banking sector faced deteriorating market conditions, tightening funding situation with rise in liquidity premia and consequent rise in cost of funding، However, following the government intervention, we noticed an improvement in the liquidity situation.
Despite the recent positive developments with regard to vaccines for Covid-19, the resumption of normal business activities is expected to take time and the banks will continue facing challenges in the coming period، With the slow projected growth in assets and the rise in delinquencies, the overall banking sector earnings are expected to be under pressure، Accordingly, the banks are required to be more prudent in their approach and also strengthen their capital and liquidity positions، In addition, the banks should leverage digital channels to improve their efficiency and streamline their costs.
Similar to their global counterparts, the Arab banks have also been significantly impacted by the deterioration in operating environment due to Covid-19 pandemic، In addition, a sharp drop in oil prices significantly impacted regional governments fiscal capacity, thereby pushing GCC economies into deeper recession.
To overcome this situation, the regional governments, in coordination with the respective central banks, have taken a wide range of necessary measures، And although these measures vary from one country to another, some of them were really very efficient, like the economic stimulus package to support various sectors, wage subsidies, waiving the government taxes/ fees/ utility bills, providing additional liquidity to banking sector, reducing benchmark interest rates, deferring instalments (with or without interest/fees) for the eligible borrowers, extending preferential interest rate on loans to needy sectors of the economy, waiving/capping of fees for banking customers، In addition, some governments took additional measures to push the banking system to increase the use of electronic payments, digital banking, ATMs etc.
These government/regulatory steps have been extremely critical in mitigating the financial and economic impact of the Covid-19 pandemic and provided the much-needed support in this unprecedented situation which prevented a catastrophic economic collapse, which otherwise would have taken longer time to recover from،
The regional regulators have also provided temporary relief from certain liquidity and capital ratios، However, these reliefs are temporary in nature and will be withdrawn once economies start recovering from the pandemic impact، These reliefs are critical to ensure that banks continue to support economic revival by extending required credit.
And despite the fact that the crisis is not over yet and banks will continue to face challenges in the coming period due to the prolonged nature of the economic recovery and the expected gradual withdrawal of regulatory measures (like deferral of NPL recognition due to Covid-19-related cash flow pressures, liquidity support etc،), it’s believed that the markets will start seeing a gradual recovery from here on،
When it comes to Ahli United Bank (AUB) in particular, over the past years, the Bank has undertaken significant Digital Transformation initiatives to deliver customer-centric solutions by offering products and services through digital channels, such as Online Onboarding for customers, e-KYC, Enhanced Mobile Banking, Video Banking at Contact Centre, Visual IVR, International remittance through ATMs, Card less Deposits at ATMs, Deposit Cards for employees to deposit into the Business account، As for the corporate customers, AUB also has made significant improvement to its market leading bespoke Business to Business (B2B) System (an award-winning transaction banking and cash management solution developed by AUB).
These digital initiatives helped the AUB to navigate this challenging and unprecedented environment by providing a safe operating environment for all staff, clients and counterparties, building a seamless remote capability to transact business and support the client needs، Accordingly, and by investing in its operational and technical capabilities AUB was able to fulfill its clients need in a secured way on a remote basis without the necessity to visit the branch, and to enhance the ability and the training of its staff to handle their responsibilities from remote locations in a controlled manner.
Like most of the banks in the region, the performance of AUB was impacted due to Covid-19 pandemic and lower oil prices، These twin shocks led to a decline in net profit that reached US$ 409،3 million for the nine months ending on the 30th September 2020, as the business growth was low, the benchmark interest rates declined by US Fed (followed by similar rate moves in AUB’s key operating markets), the economic activity was reduced leading to lower fees & commission, in addition to the higher precautionary provisions given the heightened economic and business uncertainties etc.
However, despite the difficult operating environment, AUB recorded a high Return on Average Equity (ROAE) of 12،7% during YTD September 2020 which is significantly higher than most of its peer group، This better performance than the peer group is a testament to AUB’s well-managed business model based on diversification and cross border flows supported by a prudent and focused approach to analyze and mitigate risks across the AUB Group’s markets in a profitable manner.
In addition to that, AUB has been able to maintain its solid asset quality in the post-pandemic era due to a combination of prudent credit strategy and focused recovery initiatives، As a result, the non-performing loan ratio is contained at 2،5% with a highly conservative provision coverage ratio of 163% (excluding collaterals) underlining the Bank’s conservative cash-based provisioning approach.
Recently AUB increased its stake in its Egypt subsidiary to 95،7% by acquiring additional stake through a tender offer process، The acquisition was in line with AUB’s Board approved strategy whereby the Bank actively seeks to progressively increase its shareholding in all its investee banks to fully accrete profits generated in these banks through AUB management efforts، Such investments are also considered to be more prudent given full availability and transparency of information regarding investee bank’s inherent risks and opportunities.
As the Covid-19 pandemic still causing a disruption in the business and economic activities translating to weak and uncertain operating environment, AUB will continue to put prudence at the core of all its key decisions, focusing on the adequacy of liquidity and capital and adopting a prudent risk stance.
AUB’s priorities will continue to be ensuring a safe operating environment for all staff, clients and counterparties, a seamless remote capability to transact business and support its clients in a very difficult and challenging environment and maintaining the earnings capacity in a prudent manner to be able to meet shareholders’ expectations.
