Emilio Pera, Partner and Head of Audit, KPMG in the Lower Gulf shares his thoughts on Oman and GCC’s banking sector. An OER report

What has been the impact on the banking sector in the GCC region due to the changes in the regional and global political, economic and technological dynamics?

Emilio Pera: Overall, it looks like GCC banks performed well in 2017, although growth is still not as high as the sector has experienced in recent years. Driven by the larger GCC economies, overall net profit increased 6.7 per cent year-on-year, when compared to a decline in the previous year’s growth rate (according to the GCC listed banks results 2017).

Liquidity challenges and market conditions resulted in upward pressure on funding costs in 2017. However, GCC banks have focused on cost reductions and operating efficiency, mainly through digital innovation and technology initiatives and this was reflected in the drop in cost-to-income ratio (CIR).

We expect that GCC banks will further increase their focus on these to mitigate lower profit growth rates.

These positive financial results reflect resilience and, coupled with the rising oil prices, have resulted in banks shifting strategies from the more conservative approach witnessed in recent times, to a more innovative and growth-driven focus, albeit in a measured manner.

What are the implications of the recent regulatory changes implemented by the Central Bank of Oman on banks in the Sultanate? And, what should be the key focus areas for the regulatory bodies in Oman and the region to ensure stability and growth of financial institutions in the short to long term?

Emilio Pera: Central Bank of Oman (‘CBO’) regulations aim to ensure that the banks in Oman comply with the international legislation and global best practice. This year, a new anti money laundering (AML) law was announced. Guidance on sound compensation practices, correspondent banking relationships and the adoption of IFRS 9 has also been issued.

The implementation of Basel III, together with IFRS 9, may lead to increased cost of capital for banks since the capital adequacy ratio will increase to 16 per cent by 2019, with an additional capital conservation buffer.

While it will likely take a while before IFRS 9 becomes business as usual, current IT systems and skill sets within banks need to change significantly to calculate and record changes required by IFRS 9 in a cost-effective and scalable way. Governance, data sources and models may also need to be further enhanced.

Under current principles, leased assets are not recognised on a bank’s balance sheets. However, under IFRS 16, which becomes effective on January 1, 2019 such off-balance sheet leases are expected to become on balance sheet, and result in an increase (grossing up) in the total assets and total liabilities of the bank.

While CBO has not yet issued guidance in relation to IFRS 16 or its impact on prudential reporting and CAR reporting for banks in Oman, banks must evaluate the potential impact of the new standard on their capital requirements.

Globally, banks are being disrupted by non-banking organisations, ranging from smallest FinTech firms to the biggest technology-based global corporations. How can banks compete with them or do you think banks should collaborate with the ‘enemy’?

Emilio Pera: Unlike most banks, which are characterised by corporate bureaucracy, legacy systems and processes, and costly infrastructure, FinTechs are often able to bring their products and services to market in a more effective and efficient manner. At the same time, despite the agility and nimbleness of FinTechs, banks are likely to have the upper
hand when it comes to scale and resources, something that most FinTechs need in order to grow their business from scratch.

A wave of new FinTech players are emerging with solutions covering most of the complex aspects of the banking value chain. It is clear that despite having the upper hand when it comes to scale and resources, banks may have to collaborate with FinTechs to innovate in order to stay relevant.

When the world’s leaders in transportation, accommodation, retail and media firms are all pure play technology companies with none of them having had a legacy conventional business to begin with, it may not be long before the world’s leading financial services company becomes a technology one.

Are crypto-currencies the future of finance? How do we see cryptocurrency – as an asset class or a currency for trading?

Regulations pertaining to cryptocurrency transactions at global banks are yet to be finalised but the underlying technology supporting digital currencies – blockchain – is high on the agenda of C-suite members.

With growing enthusiasm for future growth among banking CEOs (77 per cent of CEOs of banks worldwide), implementing disruptive technologies like blockchain is as high as third on the initiatives agendas.

Banks and other financial institutions that have explored using blockchain have started with cross-border payments for reconciliation and verification, with live implementation at leading international banks and other financial institutions. Digital Identifiers and KYC-related initiatives have also seen increased blockchain adoption.

It is likely that we will see more pilot projects and live projects emerging using permissioned blockchain across both the public and private sector. This may allow smaller entities to conduct business at a lower cost, while enjoying similar security, transparency and interoperability benefits.

Do you think Omani banks are on par with other top banks in the region in terms of customer focus through innovation and technology?

Banks in the region have ramped up their efforts around ‘digitisation’ to keep pace with the evolving needs of their customers, remain relevant and reduce internal costs. Steps they have taken include branch rationalization, back-office operations restructuring, launch of digital-only banking offerings and an overall focus on creating efficiencies through digital processes.

Oman’s leading banks have continued to invest significantly in customer experience, using the power of digital to transform the sector. Along with using social media to engage with a younger generation of customers, banks across the Sultanate are developing applications such as mobile wallets and other enhanced digital products. Some
of the offerings, such as augmented reality applications, have not been seen before in the GCC, suggesting that Oman’s banks may be setting the agenda
in some areas of customer experience.

What’s in store for the banks in
Oman in 2018-2019? Where do the best new business opportunities lie for the banks?

Based on the available information, it looks like the Omani banking sector remained well capitalised and profitable in 2017, and credit growth remained healthy despite economic challenges. Banks are playing an important role in supporting the economy by financing public and private sector projects, and assisting SMEs. Additionally, banks continued to attract and develop local talent which remains a key priority for the government.

Oman’s liquidity levels are primarily linked to oil prices and interest rates. Liquidity pressures have been easing with the oil price recovery in 2017, but any future fluctuations are likely to exert pressure.

The proposed introduction of VAT is expected to impact profit margins, encouraging banks to harness technology to engage with customers in new and creative ways, although the implementation has now been pushed back in Oman. Other regulatory changes such as the new IFRS standards (9 and 16) and Basel III/IV developments also continue to dictate how the sector will perform over the coming months.

At a regional level, banks may become even more customer-focused in the way they manage customer satisfaction and relationships and, in turn, develop internal KPIs to monitor progress. They also may aim to implement innovative technologies to improve the ways in which customers engage with them, in particular, through mobile applications.

Banks in the region are already ramping up their efforts around ‘digitisation’ to keep pace with the evolving needs of their customers, remain relevant and reduce internal costs. Meanwhile, we expect that regulators in the region will continue to raise the bar when it comes to corporate governance regulations, particularly as the region’s banking sector becomes more prominent on a global scale.