Banking on the Future

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A number of Abu Dhabi's leading banks are, on paper at least, paying a price for their success and expansion, reporting a drop in profits for the first quarter of 2007. However, executives have put a positive spin on the profit slide, one that is generally backed up by the figures.

In the main, it is investment in the future that has eaten into the black ink of the emirate's banks, rather than a decline in business.

On April 24, the National Bank of Abu Dhabi (NBAD) announced its 2007 first quarter results, which showed a fall in profits for the fourth quarter running. Though $163.3m, the figure was down by 4.7% on its first quarter returns for last year.

The bank saw net income from interest-based activities rise from $139m of the first quarter of 2006 to $145m, with other non-interest income up from $77.5m to $80.7m.

"Despite a quiet equity market giving no impetus to our asset management, equity brokering or securities services businesses this quarter, fees and non-interest income increased in the first quarter of this year," he said to the media after the national bank's results were released.

One key area that pushed down the results was an increase in operating costs, which came in at $60.7m, a jump of 45%. However, rather than being a result of lax management or cost overruns, this increase stemmed from the NBAD's aggressive program of modernisation and growth, at home and abroad.

NBAD recently announced it would open 20 new branches across the United Arab Emirates (UAE) and the region this year, focusing on its Islamic banking operations, as well as set up a sharia-compliant unit in Switzerland in June. Added to this have been expenses in new technology and in accommodation.

"Our costs last year grew only 12%, which was low compared to others, so this year was [a] catch up," Tomalin said.

Another factor to consider when looking at the national bank's results is the one-off boost at the beginning of last year from earnings from initial public offerings (IPOs), which added around $27m to its coffers. If this planned-for windfall is excluded from consideration, the banks would show a 20% increase in operating earnings.

The story was much the same for the Abu Dhabi Commercial Bank (ADCB), which released its first quarter results on April 17. The bank's profits were down 24% to $128m on the same three-month period in 2006. That said, if the earnings from IPOs are taken out of the equation, ADCB would have recorded growth of 35% in its core operating income, with a solid 8% increase in assets, which rose to $24bn.

The bank's core operating profit for the first quarter of 2007 rose to $193.6m, a 24% increase over the same period in 2006, while total assets increased by 8% to $23.7bn during the first three months of 2007.

ADCB saw a 14.4% rise in deposits, which totalled $13.4bn at the end of March, and an increase in loan and advance activity, up from $16.8bn the previous quarter to $17.3bn.

"Our core businesses are experiencing continued high growth," said ADCB chairman Saeed al-Hajeri. "The bank is successfully implementing its business strategic plan in the fields of wealth management, commercial banking, portfolio investments, corporate finance and retail banking which continued to produce excellent results."

A part of the necessity to expand and invest comes from the planned liberalisation of the UAE's banking sector, which will bring with it far more competition from overseas institutions than currently exists. This has prompted the drive to move into new markets and offer new services. Though most likely to be profitable in the longer term, such activities do have an effect on the balance sheet.

They can also give rise to rumours, with ADCB having to quell reports in early April that it was planning to merge with local rival Union National Bank in order to strengthen its market position.

"We have no plans whatsoever for this merger, or any merger of the sort," ADCB's vice president, Yaser Mansour, said in a report carried by the local press on April 4. "To our knowledge, there are no official sources for this information."

Another Abu Dhabi financier seeking to expand is the Abu Dhabi Islamic Bank (ADIB), though its latest foray into the international arena appears to have stalled for the moment. There is uncertainty as to whether the Egyptian Central Bank will approve a bid by a consortium led by ADIB to acquire 53% of Egypt's National Bank for Development (NBD), though private shareholders in the company have said they favour the sale.

According to the Egyptian stock exchange, if the bid is accepted, ADIB and its partners, which include the Emirates International Investment Company, will have to raise NBD's capital to $86.5m and invest to improve its operations, which in turn may affect ADIB's short-term margins.

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