Liquidity is strong in Abu Dhabi's banking sector as consolidation gains pace

Banks in Abu Dhabi are well funded and have demonstrated resilience, be that during the global financial crisis of 2007-08 or in response to local challenges since oil prices fell in 2014. They also exist in a very competitive environment that is widely seen as overbanked. After a major merger created the region’s second-largest lender in 2017, further moves towards consolidation are expected. For now, the banking system has ample liquidity and would benefit from more opportunities to deploy it.

The government has been effecting structural reforms since the 2007-08 crisis, to boost the efficiency of government spending and encouraging greater self-reliance on the part of both the private corporate and government-linked businesses. This is part of a wider effort to prepare for a long-term future in which Abu Dhabi can thrive even when oil prices drop. It is expected that oil prices will stay “lower for longer”, a widespread sentiment in the oil industry at present. The downside is a temporary shrinkage in government-driven economic activity, expected to last until adjustment is complete.

Value-added Tax

One factor that will extend this adjustment period is the UAE’s implementation of a value-added tax (VAT) on January 1, 2018, a further move aimed at de-risking the country’s long-term fiscal future. For the banking sector specifically, one impact of the new tax may be greater ease in extending credit to small and medium-sized enterprises, because maintaining VAT accounts will create a level of documentation and transparency that could serve to convince lenders of their creditworthiness.

In the short term, however, the various fiscal reforms under way have meant less demand for credit and financial services. Government spending picked up again in 2018, leading to expectations that the most difficult period may have passed, and credit growth is expected to rebound from low levels, albeit remaining well below 10%. As of the end of October 2018 it had reached 7.5% year-to-date for the industrial sector and 5.4% for the private sector. Though bank liquidity is strong and deposits are growing, some industry observers argue that the banks need more lending opportunities. For the time being, it would appear that lenders may find more opportunities to boost profit margins by addressing operational and service improvements than from top-line growth. Such improvements could include pursuing greater efficiencies, cutting costs and adopting new financial technologies.


Mergers and acquisitions could also help strengthen the UAE’s lenders. The most significant sign of consolidation to occur during 2017 came from the merger between the National Bank of Abu Dhabi and First Gulf Bank to create First Abu Dhabi Bank (FAB). These two banking institutions were formerly the largest and third-largest lenders in the UAE, respectively. With an asset base of Dh669bn ($182.1bn) at the end of 2017, FAB is now the largest lender in the UAE and 116th-largest worldwide in terms of total assets. While there is clearly an argument that further consolidation would be beneficial to the banking system of Abu Dhabi and the broader UAE, the situation can often prove complex, with more than just market factors at play. Emirates, ruling families and government vehicles own controlling or major stakes in most banks.

Lenders such as FAB or Dubai’s Emirates NBD have a nationwide presence, while other banks tend to be more focused on their home emirate. Notable examples include Bank of Sharjah, the National Bank of Ras Al Khaimah and Ajman Bank. The fragmented nature of the banking sector is thus partly a function of the federal structure. The lack of consolidation to date is also due to the nature of the private sector, as leaders here are typically family conglomerates, which tend to maintain a range of offerings across most economic sectors rather than focusing on gaining critical mass in one or two economic areas. The UAE’s insurance sector is similarly fragmented for the same reasons. Questions of licensing and regulation are handled by the Central Bank of the UAE (CBUAE). The CBUAE was established by the Union Law of 1980, which is also the main piece of legislation covering the banking sector; a revised law was issued in October 2018 covering both the CBUAE and banking sector in general. The CBUAE formulates policy, regulates lenders, ensures compliance with international standards and anti-money laundering policies, and provides liquidity instruments.

Size & Scope

Statistics Centre - Abu Dhabi bundles banking along with insurance in its financial reporting. Financial and insurance activities accounted for 9% of GDP at current prices in the emirate in 2017, with this figure having moderated slightly from 9.6% in 2016 after having increased from 8.8% in 2015. Meanwhile, its share of the non-oil economy was 14.1%, according to preliminary statistics.

As of October 2018 there were 60 licensed banks in the UAE, of which 22 are domestic. The total number of foreign lenders was 38. As of the same month there were 749 domestic bank branches and 81 foreign bank branches making a total of 830, a figure which has fallen from a peak of 874 in 2015.

The drive for efficiency also resulted in retrenchments in 2017. Domestic bank employees fell from 29,532 to 29,056, and at foreign banks the total shrank from 7439 in 2016 to 5619 at the end of 2017, and then to 5559 by October 2018. The UAE’s four largest banks account for around 62% of assets: FAB, Abu Dhabi Commercial Bank (ADCB), Emirates NBD and Dubai Islamic Bank. For the 13 banks listed on UAE exchanges, earnings rose by 6.1% in 2017, according to calculations from Al Ramz, an Abu Dhabi-based investment and brokerage house. The figure was 1.86% for those listed on the Abu Dhabi Securities Exchange, meanwhile. The UAE’s banking sector is the largest in the GCC region. The Dh2.7bn ($734.9m) in overall assets at the end of 2017 represented an increase of 4% on 2016’s total, according to the CBUAE’s annual report for 2017. Banks in the UAE are licensed at the federal level, with the right to operate across the seven emirates.

Islamic Option

Islamic banking entities are characterised by their fulfilment of sharia-compliant business models. Banks can designate themselves as Islamic or conventional, and the latter category may also offer sharia-compliant alternatives through the provision of an Islamic window. Islamic banks account for about 20% of the sector’s overall assets and activity, and have been growing at a fast pace, reflecting a broader global trend. However, this growth is admittedly from a much lower base than that of conventional banks, and is taking place in a market segment that is young and still developing.

Islamic financial institutions each have their own sharia board. These are councils made up of religious scholars conversant with finance, which issue fatwas (Islamic rulings) certifying that a specific product or report is in compliance with Islamic rules. There is no specific regulator for Islamic options, as the CBUAE oversees all types of banks, but in 2017 it established its own sharia board, the Higher Sharia Authority, which met for the first time in February 2018. It is expected to issue fatwas on the legitimacy of products, services and governance, but not to replace or overrule the individual sharia boards (see Islamic Financial Services chapter).

The UAE is also home to two separately regulated financial services centres, the Abu Dhabi Global Market (ADGM) and the Dubai International Financial Centre, free zones that provide offshore financial services but do not compete with domestic banks in retail segments of the market. Each has its own laws and regulatory bodies, and they are not overseen by the CBUAE. ADGM offers a bespoke legal and regulatory environment modelled after English common law and overseen by its own Financial Services Regulatory Authority.


According to CBUAE figures, banks in the UAE are highly capitalised, with an overall capital adequacy ratio (CAR) of 18.2% at the end of September 2018, a three-year peak. Tier-1 capital (shareholders’ equity and retained earnings) was also high, at 16.9%. Both figures exceed the minimum requirements established by the central bank, in line with Basel III requirements. As of the end of October 2018, conventional banks within the group are on average better capitalised than Islamic ones, with a CAR of 18.4% compared with 17.8%, and Tier-1 capital at 17.0%, as against 16.3%. Foreign banks are better capitalised than national banks, with a CAR of 20.4% against 17.9%, and Tier-1 capital at 18% in comparison to 16.6%.

Whilst the standard generally divides capital into two tiers, Basel III also mandates changes in how capital is counted and valued. At the heart of the adjustment is a more selective approach to valuing banks’ capital to ensure their resiliency in the case of crises. Tier-1 capital breaks down into two categories. The most valuable is referred to as common equity Tier-1 and includes types of equity. Additional Tier-1 capital is a broader category that also includes debt structures that could be converted to equity in the future. Tier-2 capital includes debt securities that are held by the bank and deemed not as safe as capital. Moving forward, local banks could require capital injections or rights issuances to maintain their reasonable margins above the minimum thresholds. For example, United Arab Bank (UAB) used a rights issuance of Dh687.5m ($187.1m) in March 2018 to nearly double its share capital. Dubai Islamic Bank also raised capital in 2018 via the issuance of 1.6bn additional shares, which boosted the bank’s core capital by over Dh5bn ($1.2bn). The UAE’s approach to bank solvency is defined by its federal structure. The CBUAE is the lender of last resort. However, should a bank’s considerable fiscal buffers disappear, the leaders of its home emirate would ultimately make a decision regarding whether to bail it out. This is how matters were handled in the aftermath of the 2007-08 financial crisis, with a number of troubled entities receiving help from individual emirates. In addition, there is no deposit insurance available in the UAE. In the wake of the global financial crisis the federal government announced that it would guarantee the deposits of all banks and foreign banks with corporations in the country. In May 2009 the Federal National Council approved a draft bill guaranteeing federal deposits, but as of mid-December 2018 this has not yet been passed into law. However, FAB stated in its bond prospectus published in August 2017 that, in the event of a major solvency crisis at the federal level, it is of the opinion that the CBUAE would choose to serve as the de facto defender of the currency and lender of last resort.


Total bank deposits climbed 4.1% in 2017 to Dh1.6bn ($435.5m), according to CBUAE data, in line with Basel III liquidity coverage requirements. National banks hold 87.3% of total bank deposits. For Abu Dhabi and UAE banks, obtaining funding does not represent a challenge, with total levels increasing from 2014 through 2016. Government deposits fell by 16.6% in 2015, for example, but the overall level of deposits still rose by 3.5%. In 2016 deposits from government-related entities (GREs), which are government-owned companies that direct their investments into the local economy, often in line with wider economic policy objectives, dropped by 11.7%, while the overall total nevertheless rose by 6.2%. Mergers and structural readjustments as well as rising rates have lowered demand for expatriate workers, a group that constitutes a key element of banks’ customer bases, and the importance of commercial and public sector deposits has hence increased. Most private sector lending goes to family companies, but they are struggling because economic growth in the past three years has been low, and their expatriate client base has been decreasing.


The resilience of bank customers in accumulating bank deposits gives lenders a solid footing, but also increases pressure on them to find uses for the money in what has been a relatively muted spending environment. Economic demand in Abu Dhabi often has its origins in government spending, such as disbursements to its GREs, which then hire contractors and spend on goods and services, and in this way funds filter through to retail growth. Domestic bank credit grew at a rate of 1.4% in 2017 according to figures from the CBUAE, which is in fact the slowest year-on-year growth on record. However, as of the end of October 2018, domestic bank credit had grown at a rate of 3.6%, although credit to GREs fell from Dh187bn ($50.9bn) at the end of 2016 to Dh160.8bn ($43.8bn) at the end of October 2018, a 14% drop. One potentially positive indication for future credit expansion was that the leading economic sectors in 2017 were construction and real estate, along with mining and quarrying.

Asset quality was a concern in 2018 for some banks in the UAE, with loans that were disbursed when oil prices were high being paid back in a less robust economy. Of the banks that report their ratio of non-performing loans (NPLs), in 2017 the range extends from a low of 2.12% at ADCB, down from 2.7% in 2016, to 6.5% at Commercial Bank Dubai, down from 6.9% in the previous year. NPLs are expected to rise in the short term, though only by a small increment that is not expected to impact system stability, according to a report released in July 2018 by global ratings agency Standard & Poor’s. The system-wide NPL ratio is expected to remain below 5%, with areas of concern regarding defaults generally being concentrated in the real estate, construction and hospitality sectors.

Retail Strategy

Historically, banks in the UAE have begun by pursuing large-scale customers and then expanded into retail banking, where competition has eroded margins and relaxed lending criteria. It is expected that over time asset quality will improve thanks to the establishment of the Al Etihad Credit Bureau, which began operating in 2014. Banks are obliged to run credit reports on their customers as well as submit data on them to the credit bureau.

Market signals suggest that access to credit is tightening for consumers. In the first quarter of 2017 credit card applications surged by 65% over the same period in the previous year, as consumers rejected by one bank sought alternatives to get the credit they were hoping for. It has proven costly to expand retail options across the suite of banking products, whether via measures such as building branches and ATM networks, or establishing phone and internet banking services. This is one reason for the shrinkage of branch networks, as lenders are looking to boost efficiency and cut costs. Dubai’s Mashreq Bank, for example, said in September 2017 that it plans to shed 10% of its workforce and rely on artificial intelligence for simpler, more repetitive tasks. For now, however, the pursuit of efficiency is a cost that has yet to pay off in the form of increased savings, with initial investments expected to reap rewards later. Operating expenses at the four largest banks increased by a margin of 10% between the third and fourth quarter of 2017.


The short-term outlook for the Abu Dhabi banking sector in mid-2018 was dominated by largely bullish sentiment. With government spending on the rise, the traditional driver of sector growth appeared to be re-emerging, albeit at a slower pace of expansion. Abdulaziz Al Ghurair, chairman of UAE Banks Federation and CEO of Mashreq Bank, predicted loan growth of between 3% and 4% for the year, an improvement on 1.4% in 2017.

While consolidation talks continue, the impact of the creation of FAB could prove hard to replicate. In September 2018 local media reported that the Sharjah government was considering a merger between three of the emirate’s banks – Bank of Sharjah, which is majority-owned by the government, Invest Bank and UAB – which could create a lender with about Dh66.2bn ($18bn) of assets. UAB and Invest Bank were quick to deny these reports, however. Another prime candidate for a merger would be ADCB, which, with Dh265bn ($72.1bn) in assets at the end of 2017, ranked as Abu Dhabi’s second-largest bank and the third largest in the UAE. Indeed, as of September 2018 ADCB was in exploratory talks with Union National Bank and sharia-compliant lender Al Hilal Bank, regarding the possibility of a three-way merger that would create the Gulf’s fifth-largest banking entity.

It is thought that mergers such as those outlined above are likely to take place, as the trend towards consolidation extends beyond the banking sector. To take an example, it was announced in March 2018 that ADIC and Mubadala Investment Company, another investment arm of the federal government with total assets of $127.8bn, were to be combined.

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