Q&A with Ovais Shabab, Head of Financial Services at KPMG: Investing in People, Creating Jobs, Inventing Strategies — it’s a World of Possibilities for KPMG Network

KPMG is a global network of independent member firms offering audit, tax and advisory services, operating in 147 countries. Here, the firm’s head of financial services, Ovais Shabab, fields questions from CFI.co

What sets KPMG’s professional services apart in KSA?

KPMG in Saudi Arabia has a unique value proposition in its tailored offerings that leverage local experience and expertise and its global network.

KPMG is the lead auditor for nine of 11 Tadawul-listed banks, and has deep knowledge of the Kingdom’s financial sector. We also have strong relations with the regulators and the of support finance companies, asset-management firms, fintechs, and the insurance industry. With our solution-based approach, our advisory services are well-received by our stakeholders and clients.

What is your track record of Saudization? Saudization is a policy implemented by KSA’s Ministry of Labour and Social Development requiring Saudi companies and enterprises to fill their workforces, to a certain level, with Saudi nationals.

“The lending space in the Saudi banking sector has seen continued growth in mortgage financing throughout the pandemic.”

KPMG plans to create more than 700 jobs over the next five years for Saudi nationals, in-line with the Kingdom’s policy. Currently, our localisation rate stands at 42 percent and is rapidly moving towards our 60 percent target. At KPMG, our capital is human capital — and that’s why we continue to invest in our people. Ultimately, they will make the difference when we address the challenges of our clients as a firm. Our learning and development efforts range from LEAP, the leadership programme for young talent across all functions, the SOCPA programme for our audit team, and the TAX Academy. We have a dedicated team to provide our people with relevant upskilling programmes to stay ahead of the curve — all strong efforts to support Saudization.

What is your outlook on the Saudi banking sector’s performance in Q4 2020?

We foresee that Q4 of 2020 is likely to be a nexus of several divergent themes, given the macro-economic developments that have taken place this year. In the grand scheme of things, the closure would depend on the continued tenacity and resilience of the sector founded on measures taken by the Saudi Central Bank and individual banks. We have observed multiple efforts towards customers’ endurance at the back of a strong capital base and funding structure of the industry. As such, we do not foresee a different proposition for the rest of the year.

Will the new five percent real estate transaction tax help to drive growth in the bank’s mortgage business in coming quarters?

The lending space in the Saudi banking sector has seen continued growth in mortgage financing throughout the pandemic. It’s a reflection of the housing demand in the Kingdom, and testament to government support measures. The implementation of real estate transaction tax (RETT) have essentially been welcomed by retail property buyers as a step-down of the tax rate from 15 percent back to five, being a non-claimable component of the purchase cost in general. If these past trends are representative for the last quarter, then, coupled with the introduction of RETT and the sale drives witnessed each year-end, it is quite likely that the overall banking sector will end FY 2020 without major impact on profitability.

KPMG’s Q3 2020 Banking Pulse report states that the process of loss quantification continues to be a challenge for banks. How can they overcome it?

The overall net profitability of Saudi banks declined six percent for the year-to-date period from FY 2019 due to higher expected credit losses of SAR12bn — a period-on-period increase of 41 percent. At present, the process of loss quantification continues to be a challenge for banks in the absence of “days past due (dpd) backstops” for facilities subject to payment holiday and useful qualitative information of borrowers in general. This translates into a continued need for judgmental overlays to cater for data gaps and therefore, the overall expected credit loss governance process is ever more important.

Do you foresee more potential banking mergers in Saudi Arabia? If so, why?

The M&A space in the banking sector is moving towards the creation of the largest lender in Saudi Arabia, with a formal agreement between National Commercial Bank and Samba Financial Group (SAMBA). This bodes well for the merging entities and the sector in general. The entities can leverage on the experience of Saudi British Bank and Alawwal Bank and focus on cost and revenue synergies. With significant investments in technology and people already made by Saudi banks in recent past, cultural and infrastructural integration will be a priority. Timely and effective stakeholder engagement, as well as pre-merger planning, remain the key for reaping all anticipated post-merger synergies.

Are Saudi banks ready to embed ESG into their business strategies? What are the possible benefits of such a move?

A key element gathering swift momentum in the banking sector is ESG: three central factors in measuring the sustainability and societal impact of a business. The immediate health and economic crises pushed the sustainability agenda to the back-burner. However, KPMG’s view suggests that ESG will increasingly become central to the economic equation globally, and Saudi Arabia will be no exception in the post-COVID world. While the pandemic may have slowed progress, banks across the globe continue to embrace the ESG agenda. New products and models are constantly developed, tested and commercialised. Retail banks are creating unique, sustainable banking and investing products and services. The bottom line is that banks can no longer afford to overlook ESG, and must embrace it to avoid constrained growth and increased regulatory and public scrutiny.

How does the VAT increase to 15 percent impact banks?

The recent increase in the value-added tax (VAT) rate from five to 15 percent has introduced some complexities to the tax considerations of the banking sector. Given the mixture of taxable and exempt supplies that banks provide, the increased VAT rate will lead to deductibility challenges on operational and capital expenditure relating to exempt supplies. In addition to managing the impact of VAT on fee-based services, banks face the challenge of managing a 10 percent increase in VAT incurred on their purchases. Tax technology solutions will be needed more than ever before to minimise risk while taking into account competitiveness, profitability, and cashflows.

How do you rate Saudi banks in terms of deploying tax technology solutions post-VAT increase?

Unless it is a foreign bank with a fair degree of non-zakat obligations (zakat obliges individuals to donate a certain proportion of wealth each year to charitable causes), we haven’t seen a lot of tax-specific technologies in the banking environment — as compared with the more widely implemented product and accounting technologies such as product management and analysis tools. If the bank has corporate income tax obligations, we have seen some use of consolidation type accounting tools.

On the indirect tax side, we know that some banks have bought indirect tax solutions. This appears to be inconsistent in terms of effectiveness — managing VAT can result in complex calculations. On top of that, there are challenges with the completeness and accuracy data that many businesses face. To improve in this space, we anticipate that banks will continue to employ senior tax professionals to manage the entire tax environment.

Acquiring the necessary skills and experience remains a challenge, because as a professional environment tax is relatively new (but developing) in Saudi Arabia. But it is evolving rapidly and presents a major challenge in terms of keeping up-to-date. Technology can definitely play a role, but it also depends on the banks’ capacity to use and manage technologies well, from people and operating model perspectives.

Banks require a target operating model for tax — an end-to-end model to run taxes before technology is introduced. From a governance perspective, it is wise to have a voice at board-level to ensure the needs of the tax team are not ignored. Even if there are robust accounting systems in place, taxation brings a different dynamic. It is not technology first, but rather the other way around; first your operating model, then your people, then the compatible technology.
Currently, for banks in Saudi Arabia, tax target operating models are at early stages of development. With more changes to the tax environment, including the prospect of e-invoicing, the need for a strong tax operating model to support the management of tax risk is becoming ever more urgent.

About Ovais Shabab

Over 22 years working in KPMG offices in Kingdom of Saudi Arabia, UAE and Pakistan, Ovais has gained significant experience of multi-locations and multi-cultural environments. He is currently managing a portfolio of clients involved in various sectors and having distinguished complexities. During his association with KPMG he has worked on various audit and advisory engagements such as due diligence, business restructuring, compliance & internal controls reviews and accounting advisory projects.

Professional and Industry Experience

Ovais epitomizes a wealth of assurance and advisory experience in the financial services sector, amassed over 20 years of his association with various KPMG offices. During his 15+ years with the Saudi practice, he has led successful engagement delivery to some of our flagship Audit clients. His sound credentials have enabled him to advise and successfully collaborate with prominent regulatory bodies in KSA, including SAMA, SOCPA, and CMA.

For all engagements, Ovais remains responsible for Presentation to the BODs, Audit Committees and Senior Level Executives for communicating the Audit Plan and Results of our audit; and liaison with the Senior Management throughout the year to understand key developments and issues; suggesting solutions and improvements in the business processes.