Another year of steady asset growth has seen the UAE banking sector retain its position as the largest in the GCC and, as usual, the Abu Dhabi-based component has played an important part in the expansion. Having successfully emerged from the global economic turbulence of recent years, the sector is on a trajectory of loan-book growth and sustainable profits. It is now looking to expand its activities in both the domestic market and abroad. While the legacy of 2007-08 means that challenges remain within the system, improvements in the sector’s operating environment and an ongoing recovery of the domestic real estate market, combined with high liquidity and capital buffers, make for a promising outlook for the emirate’s banks.
According to the UAE Banks Federation, the combined assets of banks in the country stood at Dh1.95trn ($530.8bn) at the end of 2013, making the nation home to the largest banking sector in the region. What is remarkable about this development is the rapidity with which it has been achieved. Until 1973 the UAE did not have its own currency, relying instead on the Bahraini dinar and the Qatar/Dubai riyal for cash transactions. Banking in the modern sense did not begin in the emirate until the creation of the UAE dirham that year, which was overseen by the newly established Currency Board. Having introduced the nation’s first notes and coins, the board reverted to an oversight role, working with the IMF to produce annual reports and bi-annual bulletins to track the progress of the small number of banks that had begun to establish themselves in the emirate.
By the end of the decade, Abu Dhabi’s economy was heating up on the back of an expanding hydrocarbons industry, and the emirate’s banking sector entered a new phase of development, which called for enhanced regulations. The transformation of the UAE Currency Board into the Central Bank of the UAE (CBU) came in response to this need. The law establishing the new body granted it a wide array of powers, including the formulation of monetary, credit and banking policies. Since then, the CBU has overseen a rapid rise in economic activity, with cash in circulation increasing from Dh2.4bn ($653.3m) in 1980 to Dh286.6bn ($78bn) as of August 2014. It has also successfully charted a course through the global financial crisis, allowing the local banking sector to keep growing despite economic and political instability elsewhere in the region.
The Industry Today
Thanks to the federal nature of the UAE, financial institutions headquartered in Abu Dhabi operate in one of the most vibrant sectors in the Middle East. Able to conduct transactions on a border-free basis across the nation’s seven emirates, they compete for business in a market where domestic giants rub shoulders with foreign institutions that have established a presence in the country.
As of September 2014, a total of 23 national banks had licences to operate in the UAE. The networks of local banks, meanwhile, have continued to expand in recent years, reaching 1011 branches in the third quarter of 2014, up from 805 branches in 2012. The CBU also recorded 28 foreign banks in operation in 2014, with a total of 170 branches.
In addition to the local and foreign banks under CBU regulation, the wider UAE market includes around 350 financial firms operating from within the Dubai International Financial Centre, a free zone for institutional and private banking. This means that, besides being the largest banking sector in the GCC by assets – with around 30% of the region’s total in 2014 – it is also one of the most fragmented.
At the close of 2013 the largest bank in the country, Emirates NBD, held 20.2% of total loans, a relatively small market share compared to leading banks in neighbouring countries. The next nine largest banks, meanwhile, accounted for 61.4% of total loans, while the remaining 41 accounted for 18.4%.
Within this diverse and competitive environment, Abu Dhabi’s banks play a leading role in economic development through their lending and investment activities. With total assets of Dh376.1bn ($102.4bn) as of the end of 2014, National Bank of Abu Dhabi (NBAD) is the second-largest bank in the UAE and runs the largest loan book of Abu Dhabi-based institutions, valued at Dh194.3bn ($52.9bn). Majority-owned (70%) by a sovereign wealth fund – the Abu Dhabi Investment Council (ADIC) – NBAD is at the centre of the emirate’s economic development.
As a universal bank NBAD has adopted a diversified business model, covering domestic and corporate banking, real estate, global financial markets and wealth management, as well as an international division with networks in nine Arab countries and branches or representative offices in the UK, France, the US, Hong Kong, China, Malaysia and Brazil.
The appointment of a new CEO in 2013 brought a fresh strategic direction. “NBAD’s expansion strategy is built around three geographical pillars,” Alex Thursby, Group CEO of NBAD, told OBG. “First, in the home market, to build the largest, safest and best-performing bank in the UAE and, over time, in the GCC; second, to deepen our wholesale network across the West-East corridor and integrate the bank’s European and North American platforms into this network; and third, to build five international bank franchises in the largest and fastest-growing economies in the West-East corridor.” The bank’s plan to increase its activities in the West-East corridor – a vast geographical span from West Africa to East China – provides a potential growth model for other UAE banks in expansion (see analysis).
With assets of Dh212.2bn ($57.8bn) at the end of the fourth quarter of 2014, First Gulf Bank (FGB) is both the second-largest bank and largest privately owned lender in Abu Dhabi. Established in 1978, the historically retail-focused institution has developed a universal set of services, encompassing core revenue drivers like wholesale and consumer banking, as well as incremental revenue streams derived from Treasury and global markets, and a range of subsidiaries and associate companies. The latter includes interests in regional banking, asset management and real estate, such as First Gulf Libyan Bank, First Gulf Properties, Aseel Finance, Dubai First, Mismak Properties, First Merchant International and Radman Properties. The bank also offers sharia-compliant products through its Islamic window, Siraj. Although its sovereign links are more limited than some of its competitors, the sizeable stake held by Abu Dhabi’s ruling family (65%) and the bank’s emergence from the global economic crisis with better capitalisation levels help underwrite its stability.
Abu Dhabi Commercial Bank (ADCB) is the third-largest lender in the local market, with total assets of Dh204bn ($55.5bn) as of December 31, 2014. The bank is linked to the state by the sizeable interest (58%) held by ADIC. This advantage is reflected in its historical weighting towards wholesale business, although in recent years it has established itself as a strong retail player in the local market, with more than 50 branches and four pay offices across the UAE, as well as two branches in India, one in Jersey and a representative office in London. As part of this effort the bank has invested heavily in alternative channels, including online banking and voicepass biometrics, and deployed retail-centred corporate imaging. ADCB’s strategy for expansion has focused on organic growth in the UAE, such as the establishment of a sharia-compliant division, ADCB Islamic Banking, though it has also made significant investments abroad (see analysis).
Abu Dhabi Islamic Bank (ADIB) is the largest sharia-compliant bank headquartered in the capital and the second largest in the UAE, as well as the fourth-largest bank in the emirate, with assets of Dh111bn ($30.2bn) as of the end of 2014.
ADIB’s growth strategy is built around three pillars: establishing itself as a market leader in the UAE by developing its private, personal, business and wholesale banking components; creating an integrated financial services group and capitalising on synergies in its diversified offerings; and pursuing growth opportunities outside of its home market. In 2014 the bank expanded its operations to the expatriate market segment, while still keeping the focus on its existing customer base, as evidenced by its acquisition of UK-based Barclay’s retail business in the UAE in April 2014.
Union National Bank (UNB) is Abu Dhabi’s fifthlargest lender, with assets of Dh93.5bn ($25.5bn) at the end of the fourth quarter of 2014. The bank’s ownership is unique in that it is the only bank in the UAE to be jointly owned by the governments of Abu Dhabi and Dubai. The UNB Group also has one of the oldest brokerage firms in the country as a wholly owned subsidiary, while its Al Wifaq Finance Company provides shariacompliant financial, commercial and investing services to both organisations and individuals. UNB offers an array of wholesale and retail banking services through its network of 63 branches distributed across the nation.
A notable feature of the UAE banking sector has been its resilience to the effects of the global economic crisis of 2007-08. Although the economic turbulence that followed resulted in some impaired assets and a slowdown in profit growth, the soundness of the sector – marked by high capital adequacy ratios – was sustained throughout the period.
In 2013 the nation’s banks performed well, thanks to a more stable macroeconomic environment, the recovery of the real estate market and improvements in investor sentiment. This was largely due to developments likes the country’s MSCI status upgrade from frontier to emerging market (see Capital Markets chapter) and the awarding of World Expo 2020 to Dubai.
According to the CBU, bank assets in the sector rose by 8.5% in 2013 to reach Dh1.95trn ($530bn), while deposits increased by 9.33% to Dh1.28trn ($348bn) and total lending was up 7.3% to Dh1.18trn ($321.2bn). Of particular note was growth in lending to companies, which expanded 15.2% year-on-year (y-o-y) to Dh455bn ($123.9bn), reflecting greater confidence in the economy. The year was also a profitable one, with aggregate sector profits increasing from Dh26.5bn ($7.2bn) in 2012 to Dh31.6bn ($8.6bn), a rise of 19.2%. The robust performance of 2013 continued into 2014. As of August, deposits were up by 11.2%, while lending and total assets increased by 5.7% and 8.2%, respectively.
Abu Dhabi’s banks have played a positive role in this growth. According to an OBG analysis of the emirate’s “Big Five” institutions, aggregate assets expanded by 7.7% over the course of 2013 to reach Dh893bn ($243.1bn), rising further to Dh942.4bn ($256.5bn) by the end of the first half of 2014. All of the banks under review succeeded in increasing their customer deposits over the year, as well as their loans and advances. Similarly, all showed a profit in 2013, with FGB posting the highest in absolute terms – Dh4.8bn ($1.3bn), or a 14.3% y-o-y increase – and ADCB showing the highest percentage gain, at 28.6%, to reach Dh3.6bn ($980m). This trend continued in the first half of 2014, with all five banks posting a net profit. The largest gain in absolute terms came from NBAD, at Dh2.83bn ($770.3m), for growth of 7.7% y-o-y, while the highest percentage increase came from ADIB, which was up 34.4% to reach Dh855m ($232.7m).
Of the notable market trends that emerged over the past year, one of the most salient is the recovery of the real estate market and the levels of credit extended to it. In 2013 lending by UAE banks to the construction and real estate sector showed its most significant rise since 2008 – a trend that continued into 2014. The development has caused some observers, including the IMF, to raise concerns about risk. However, a more comprehensive regulatory regime (including more stringent mortgage regulations) and a very different macroeconomic scenario than five years ago have led most industry participants and ratings agencies to take a more favourable view. In August 2014 Fitch reported that rising residential real estate prices did not pose a serious threat to Abu Dhabi banks, as the industry is not reliant on leverage and is backed by stronger fundamentals (see analysis).
Retail loans are another area of growth, and fierce competition in this segment has left banks competing on the basis of customer service in order to gain traction. Personal loans to residents have ticked steadily upwards over the past year, according to data from the CBU. As of September 2014 personal loans were up 10% y-o-y to reach Dh307.5bn ($83.7bn).
“Some say there are too many players operating in the sector, but that has contributed to the availability of historically low borrowing costs,” Ala’a Eraiqat, the CEO of ADCB, told OBG. In addition to supporting retail loan books, this has also had an impact on public sector borrowing, according to Eraiqat, who added, “This has been critical as a means to fund major infrastructure projects and basic developments.”
An increasing proportion of this loan growth is being claimed by the Islamic segment, with sharia-compliant banking capturing a 21.4% market share in the UAE in 2013, according to the “World Islamic Competitiveness Report 2014-15” by EY, up from 17% in 2012. The emirate’s two sharia-compliant players – ADIB and Al Hilal Bank – are playing a key role in the market’s expansion (see Islamic Financial Services chapter).
The UAE banking sector is also increasingly being driven by technology. According to the UAE Banks Federation, some 76% of bank customers in the country had registered for online banking as of May 2013, while by September 2013 most consumers had opened two bank accounts to manage their financial affairs. Additionally, 72% of bank customers used credit cards.
One of the most frequently cited reasons for the strong performance of the UAE’s banks in the challenging aftermath of the global financial crisis is the CBU’s reaction to the credit crisis. Since 2010 the regulator has sought to address the potential systemic risks that were exposed by the deteriorating economic scenario.
Reforms included the establishment of a better framework for banks to evaluate their loans and advances portfolio to reflect asset quality (the Provisioning Circular of 2010), as well as closer regulation of retail lending through caps and fee limits (the Regulations No. 29/2011 regarding Bank Loans & Other Services Offered to Individual Customers). The latter – although considered a prudent response to over-borrowing by UAE nationals – posed a challenge to the industry, and its effects were immediately apparent in the reduced revenue from fees and commissions posted by all five of Abu Dhabi’s top banks in 2011.
More recently, the CBU has moved to address the risks associated with large exposure of financial institutions to government-related entities. In April 2013 the CBU capped lending at 100% of a bank’s capital base for loans to governments of the federation (as well as their noncommercial entities).
The central bank also capped lending at 25% for individual borrowers. However, after consultation with banks, the regulator agreed to discard the initial deadline of end-September 2013 and allow a grace period of five years to meet the target. Under the new arrangement, they are allowed to reduce their balance sheet exposure to government-related entities by 20% per year until the required level is reached.
The question of exposure to government-related entities is linked to a more general ambition on the part of the central bank to ensure the future stability of the banking sector. In 2014 the CBU’s Financial Stability Unit (FSU) released its second report on the macro-prudential scenario in the UAE. This wide-ranging document covers areas such as domestic economic outlook (including inflation, oil prices and the real estate market), as well as indicators of financial soundness in the banking sector (including profitability, capital adequacy ratios, asset quality and liquidity). In order to compile its reports, the FSU has overhauled the process by which banks submit data to the CBU, which is done on a monthly and quarterly basis. The FSU introduced its new methodology in June 2013.
Looking ahead, more regulatory change is likely to be spurred by the introduction of a new Financial Service Law, currently in draft form. While the final provisions of the law have yet to be decided, it is possible that the UAE will move to a twin-peaks model of regulation, similar to what is used by Australia and the UK. Under the new system the CBU is likely to act as the prudential regulator, while the Securities and Commodities Authority would assume the role of conductof-business regulator. This coalescence of prudential authority over the entire financial sector in the CBU may make it possible for the FSU’s reporting to, at some point, trigger direct action by policymakers.
Abu Dhabi’s banks face several challenges in the coming year, with key risks stemming from the possibility of large, restructured payments – the potential non-payment of which might compel some banks to increase provisioning and thereby reduce profitability. However, the general outlook for the sector is good, thanks to healthy economic growth in the UAE and the solid fundamentals of individual lenders. Capitalisation levels have risen from 19.2% in 2009 to 19.3% at the start of 2014, while the loan-to-deposit ratio improved from 103.5% to 92%. Expanding from this base, Abu Dhabi’s lenders are likely to continue claiming business by upgrading customer service levels and exploring opportunities in foreign markets.
Another area of interest in the coming year will be the effect of Abu Dhabi’s new Al Etihad Credit Bureau, which issued its first reports in late 2014. It told the local press that more than 30 banks and lending institutions had already subscribed to its services as of November. While some banks have expressed a hesitancy to use the bureau’s data due to concerns over legal responsibility for incorrect information, in the long term the institution’s establishment is expected to provide a useful fillip to the retail lending segment.
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