Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.
If you would like to participate please email gerard.aoun@refinitiv.com.
1) What are the main cybersecurity risks facing the banking industry worldwide at the moment?
The threat of data loss through cyber attacks is one of the main concerns facing the banking sector. This has been consistently reinforced, with the introduction of stringent data protection regulations amidst a surge in the outsourcing of banking businesses through cloud.
In today’s evolved banking environment, more and more external parties are getting involved – which, in turn, leads to increased concerns and risks by way of cyber attacks, loss of data, and probably even financial loss.
The systems are getting exposed to a number of other risks, such as malware attacks through emails. Then there is the distributed denial of services (DDOS), where intended users are denied access to banking services by way of a cyber attack. The other risks include phishing attacks, or website defacement, which targets popular banks.
2) Are there any specific risks for the region that you can tell us about? What would keep your clients awake at night?
There has been an emphasis on outsourcing at banks in the region - mainly to reduce costs and achieve economies of scale.
In this process, banks tend to engage with lot of third-party vendors, who are exposed to increased cyber risks. The information security that banks take seriously is sub-optimal at the vendors’ end, which is why attackers tend to exploit it and gain backdoor access to the banks.
This is one of the primary risks. The UAE regulator is planning to come out with an outsourcing regulation. It is still in the draft stage.
3) What is your view on AI and machine learning? Do they pose a threat or an opportunity for the banking industry?
Artificial Intelligence and machine learning offer immense opportunities for the banking sector. From providing relevant product and service to the customers, through to fraud and risk management, these are great advocates to take the banking sector to the next level.
Machine learning is key to the banking industry, in terms of analytics. The better the analytics, the better it will be for banks to serve customers, which will protect the customers and the banks, thus creating a win-win situation for everyone.
4) What about blockchain and cryptocurrencies?
Blockchain is an interesting and powerful technology that would offer a lot of benefits in the right scenario.
One of the things that we are already involved in is the shared KYC (Know Your Customer) that we have worked on with the Government of Dubai and a consortium of banks. As it goes live, it will be a huge positive disruptor that will benefit all the banks and will provide a transparency and historic audit trail for the industry’s benefit.
On the other hand, cryptocurrencies have lot of potential. But this is a space that needs more regulation and control.
5) What risks are you most concerned about in 2019?
There are a number of risks facing banks and financial institutions today - be it business risks, strategic risks, compliance risks (including that of Shari’ah in case of Islamic financial institutions), credit risks etc. All these risks in one form or the other affect banks in 2019 as well - not only for our own investment but also for our clients.
The biggest risk to manage in 2019 will be that of compliance with both global and local regulatory requirements. The global compliance is of much significance here because of FATCA (The U.S government’s Foreign Account Tax Completion Act) and CRS (Common Reporting Standards) etc. Compliance has historically been a bigger challenge, as we all know.
Second is the technology risk, where we want to keep ourselves protected from cybercrimes and at the same time not stay behind in the fintech evolution happening in the world.
Third is conduct risk. This covers how the bank conducts its business with the clients with all the disclaimers, and avoiding misrepresentation and how bank policies are governed, to protect the bank from reputational and financial risks.
With regards to the clients’ wealth management, it is more in terms of market risks (rate tightening, global economic slowdown, geopolitical risks for this region, a trade war globally between the United States and China and the fate and impact of Brexit, among others).
6) What is the future of risk technology?
Risk technology is increasingly getting embedded within business processes and systems. In the long-run, risk technology is unlikely to exist in isolation – rather, it would become part of the business solution. Risk management, by virtue of technology, is encouraging risk consciousness, or awareness and risk behaviour across the whole, to help manage risks across a financial institution.
7) What do you think of fintech? How is technology affecting investment decisions in the region?
Fintech provides great opportunities for the banking industry and the customers – revolutionising the way we do banking.
Noor Bank is an advocate of fintech, and we engage with regional accelerators and start-ups to participate and encourage the ecosystem. We believe fintech is the future.
8) What has Noor Bank done in terms of adopting financial technology? What future plans do you have?
Innovation is key to our strategy and we see fintech as part of this journey. Noor Bank is actively involved in the fintech realm, where we collaborate with fintechs to solve problems specific to Noor Bank through collaboration with entities across the government and other banks.
We also continuously engage with fintechs across the world to explore some of the best solutions and advancements that can benefit our customers - directly and indirectly.
In this part of the world, specifically in Dubai, we participate in accelerators such as the DIFC Fintech Hive. We have helped the fintech community grow and flourish through our mentoring and coaching initiatives.
9) Do you think the region is facing a liquidity problem? Does the strength of the dollar play a role in the lack of liquidity?
There is no liquidity problem in the region. The Central Bank has been assisting the banks in ensuring the market is flushed with liquidity.
Having said this, markets in general, have witnessed a slight liquidity crunch, partially led by a cautious approach from the banks to ensure no asset bubbles emerge post-the Lehman collapse. Secondly, by the actions of the U.S. in the last couple of years, where they have continuously been slowing down on quantitative easing and a hike of the Fed rates (in 2018). However, I don’t see the rates going up significantly in 2019.
The third one is the high volume of the U.S. treasury issuance, because of the budget deficit that the U.S. is facing.
These factors actually saw the dollar strengthening, which led to a flight of capital across emerging markets, with some impact faced by regional markets as well.
To an extent, I say the dollar being a pegged currency for the UAE, the impact was minimal. Banks in the region are well-capitalised and have sufficient liquidity to sustain economic growth.
10) Moody’s said last week it expects UAE banks’ loan losses to widen because of exposure to real estate. How exposed is the bank to the real estate sector, and what’s your view on real estate’s risk to the UAE economy?
Historically, GCC banks have had a highly-concentrated lending / financing book and had large exposure to the real estate .
Even today, if you look at various banks, their exposure to the real estate sector by way of financing is close to 50 per cent. For us, though, we are quite diversified and moderate as our exposure to real estate stands close to 17 per cent as of December 2018, which is well below other financial institutions in the region. Our goal is to run a balanced and diversified business with minimum concentration on any particular sector.
Though the property prices have been declining over the last five years, the UAE government has now introduced new laws which are expected to support investments in the property sector. The introduction of long-term visas, the change in foreign ownership law, and a change in mortgage laws are expected to support UAE property prices.
We see this as an opportunity - at least from the wealth management perspective, where the yields on these properties are quite high compared to the rest of the world.
11) What would be your recommendation for potential asset buyers and sellers looking at the region?
In the past few years, asset prices in the region have gone to attractive levels. Hence, one recommendation would be to go for good quality assets with a view of holding these assets for a minimum of five-to-ten years or longer. We believe that it is imperative to have this lock-in period as we expect more positive reforms in the UAE, which will further boost the upward momentum in prices, leading to higher returns on investments.
12) How do you think an investment portfolio should be managed currently? Will diversification erase the volatility risk?
In the investment management business, it is paramount that the portfolio is diversified and investments are focused on high quality assets so that downside risks are managed in the event of market volatilities. It is equally important to avoid unwise market exits that could have a negative impact on the portfolio.
In other words, diversification is the key and we need to look beyond traditional sukuk in the portfolio. Volatility risks cannot be fully eliminated and hence a diversified portfolio not only navigates you through the volatilities but also helps you to stay invested and exit at the right time to generate the best possible returns.
(Editing by Gerard Aoun and Michael Fahy)
Any opinions expressed here are the author’s own.
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