Banks in the UAE could see more job cuts as the pandemic-related economic slowdown, the postponement of Expo 2020 and a lower interest regime drive down their profitability levels.
Emirates NBD, Dubai’s largest bank, said earlier this week that it was laying off around 800 people as it seeks to find the “right size” to meet its anticipated future business needs.
“The banking sector in the UAE is facing a lot of pressure due to the unprecedented compression in net interest margins, slowdown in the economic activity, low oil prices and worsening asset quality. Banks are forced to [justify] their expenditures and reduce costs. I will not be surprised to see further announcements related to cost reduction, as the economic conditions are unprecedented,” Ali El Adou, Head of Asset Management at Daman Investments, told Zawya.
For the first quarter of 2020, the top 10 UAE banks reported a combined 22.4 percent drop in net income quarter-on-quarter, according to a report by Alvarez & Marsal (A&M). Return on equity (RoE), a key profitability ratio, fell to 9 percent in Q1 2020, compared with 15.4 percent in the year-ago period. Cost-to-income ratio, however, improved slightly, with a rise to 34 percent, as cost-cutting measures adopted by the banks led to a reduction in operating expenses.
“In the banking sector, the consolidation trend started few years ago with M&As. We will be seeing layoffs with the results announced in coming quarter,” Vijay Gandhi, Regional Director at organizational consulting firm Korn Ferry, told Zawya. He added that while permanent layoffs were not as prevalent as leave management and salary cuts in April, there have been actual job cuts since early May.
In March, Fitch Ratings cautioned that UAE banks’ credit profiles could deteriorate due to the economic effects of the COVID-19, adding that there could be a wave of mergers and acquisitions, particularly among banks with weaker franchises, if coronavirus challenges persisted.
Any such consolidation would put more pressure on financial sector jobs. Following their mergers, the UAE’s biggest banks, including the First Abu Dhabi Bank, Emirates NBD and Abu Dhabi Commercial Bank, downsized employees, citing redundancies.
One of the main objectives behind bank mergers is the synergies leading to costs optimization in merged banks, said El Adou. “Last year, we saw layoffs due to the mergers between Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank, which made sense from a cost optimization perspective.”
The UAE central bank’s data shows local banks had laid off 446 people over the same period a year ago, at the end of September.
The drive towards digitization across the financial sector is also causing banks to review their back-end and retail cost centers, leading to further job losses.
“Banks have been investing heavily in IT infrastructure, which is not only reducing their reliance on the branches to expand their business but also improving operational efficiencies,” said El Adou.
One of the unintended consequences of the coronavirus-related lockdown is that digital banking has gained greater traction.
“We will see workforce management cater to more customers through digital banking and re-look at the way banks service their retail and corporate clients with fewer branches and active engagement with corporate and high-net-worth clients. Post-COVID, the workforce in every industry will go through a shift, with changing business models,” said Gandhi.
El Adou agrees that when economic activity resumes, banks will look into their staffing needs within the areas of growth, taking into account the new era of digital banking.
Moody’s has downgraded the credit outlook of eight UAE-based banks from stable to negative: Emirates NBD, Abu Dhabi Commercial Bank, Dubai Islamic Bank, MashreqBank, HSBC Bank Middle East, Abu Dhabi Islamic Bank, the National Bank of Ras-Al-Khaimah and the National Bank of Fujairah.
While HSBC has not yet announced any plans for layoffs in the region, the UK-listed bank last week said it has resumed its plans, originally announced in February but put on hold due to the pandemic, to cut 35,000 jobs around the world.
(Reporting by Brinda Darasha; Editing by Seban Scaria)
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