Dubai is home to some of the Middle East’s largest banks, as well as its major financial free zone. The emirate’s financial institutions have largely recovered from a rise in non-performing loans (NPLs) in the wake of the 2008 financial crisis, and are well capitalised and liquid despite a recent rise in delinquencies in the small and medium-sized enterprise (SME) segment.
A new bankruptcy law and a recently launched credit bureau are set to underpin sustainable lending growth, and segments like Islamic banking and new financial technologies, with its advancement of block-chains (see analysis), are helping to drive expansion and improve access to credit.
Of 23 Emirati banks, six are headquartered in Dubai: Commercial Bank of Dubai, Dubai Islamic Bank (DIB), Emirates NBD, Emirates Islamic (the Islamic unit of Emirates NBD), Mashreq Bank and Noor Bank. Banks in the UAE tend to work across the country as a whole, rather than operating exclusively in the emirate in which they are headquartered, meaning that Dubai-based banks face substantial competition from other major Emirati players. However, banks’ retail operations tend to be more, though not exclusively, focused on their home emirates. For example, National Bank of Abu Dhabi, the largest Abu Dhabi bank by assets, had 43 branches in Abu Dhabi as of October 2014 compared to 19 in Dubai, according to the most recent available breakdown. Emirates NBD operated 85 branches in Dubai compared to 16 in Abu Dhabi.
The largest Dubai-based player, and the second-largest bank in the UAE by assets, is Emirates NBD. The bank came into being in 2007 through the merger of two Dubai-based banks: Emirates Bank International and the National Bank of Dubai. The government of Dubai is the institution’s majority shareholder, via the state-owned Investment Corporation of Dubai, with a stake of 55.8%. Capital Assets is the only other shareholder with a stake of more than 5%, on 5.3%. Shares in the bank are also listed on the emirate’s domestically focused stock exchange, the Dubai Financial Market (DFM), with foreigners limited to a maximum combined shareholding of 5% in the institution.
Emirates NBD had assets of Dh456.2bn ($124.2bn) at the end of June 2017, up from Dh448bn ($121.9bn) at the end of 2016 and Dh425.8bn ($115.9bn) as of mid-2016. The mid-2017 figure was more than twice the size of its nearest Dubai-based competitor and was equivalent to 17.2% of federal banking assets, underscoring the systemic importance of the bank to the emirate and the wider national banking system. For 2016 as a whole it accounted for 49% of the emirate’s total banking assets, according to the full-year financial statements of Dubai-based banks. Despite its size, the bank continues to grow rapidly, with assets expanding at a compound annual growth rate (CAGR) of 10% since 2012.
Loans accounted for 66.64% of Emirate NBD’s mid-2017 asset base, on a value of Dh304bn ($82.7bn), up 6% year-on-year (y-o-y), and up from Dh290.4bn ($79bn) at the end of 2016. The increase was driven largely by growth in corporate lending, led by the real estate and trade sectors. Conventional loans to corporations dominated the bank’s books, standing at Dh242bn ($65.9bn), up from Dh225bn ($61.2bn) a year earlier. Consumer loans were valued at Dh35bn ($9.5bn), up from Dh31bn ($8.4bn), while total Islamic lending (conducted through its Emirates Islamic unit) fell to Dh52bn ($14.2bn), from Dh54bn ($14.7bn) in mid-2016, which the bank attributed to tighter underwriting standards at the unit.
Customer deposits, which made up 80% of the bank’s liabilities, were worth Dh320bn ($87.1bn), up 7% y-o-y, for a loan-to-deposit ratio of 95%, down from 96.1% a year earlier. Dh181bn ($49.3bn) of deposits were in the form of current and savings account deposits, while Dh131bn ($35.7bn) were time deposits. Debt and sukuk (Islamic bonds) accounted for 10% of the bank’s liabilities, mostly in the form of euro medium-term notes, and borrowing from other banks comprised 6%. The contribution of bonds and sukuk to the bank’s funding mix has been rising in recent years, with the bank seeking to increase this further and lengthen maturity periods as it moves into the Basel III era, which rewards longer-dated liabilities.
Net profits at the bank for the first half of 2017 were up 5% y-o-y, reaching Dh3.89bn ($1.1bn). Profits for 2016 as a whole stood at Dh7.2bn ($2bn), only slightly increased from Dh7.1bn ($1.9bn) in 2015 but up from Dh2.6bn ($707.7m) in 2012, pointing to a 30% CAGR in profits. The bank’s NPL ratio, meanwhile, eased from 6.6% in mid-2016 to 6.4% at the end of the year, and 6.1% as of end-June 2017. Its coverage ratio rose to 123.5% at the end of the second quarter 2017, up from 118.5% a year earlier.
In addition to its activities in the UAE, the bank also operates an Egyptian unit, Emirates NBD Egypt, which has 64 branches, as well as branches in the UK, Saudi Arabia and Singapore. The bank was reported to have been one of the top bidders for Barclays Bank Egypt when its UK owner put it up for sale in 2016, though this was ultimately acquired by Morocco’s largest financial institution, Attijariwafa Bank. However, the expansion of foreign operations in general, particularly activities in Egypt, is a strategic priority for the bank as it remains on the lookout for potential acquisition opportunities in MENA.
DIB is the second-largest bank headquartered in Dubai, as well as the largest Islamic bank in the UAE and the third-largest in the world by asset size. As with Emirates NBD, the bank’s largest shareholder is the state-owned Investment Corporation of Dubai, though in this case with a minority stake of 28.3%. The general public holds a combined 64.8% of the institution via shares listed on the DFM. The bank recorded total assets of Dh193.1bn ($52.6bn) at the end of the first half of 2017, up 10% on the end of the previous year. Lending (net financing) rose by 9% over the same period, to Dh125.4bn ($34.1bn), spread across both corporate and retail activity, while investment in sukuk stood at Dh26.4bn ($7.2bn), up 13%. Net profit reached Dh2.14bn ($582.5m) in the same period, a 7% increase on the first half of 2016 (see Islamic Financial Services chapter).
Mashreq Bank, the third-largest bank headquartered in the emirate, is privately owned, with 97% of its shares in Emirati hands. Its largest shareholders are Saif Al Ghurair Investment, with a 39.5% stake, and Abdulla Ahmed Al Ghurair Investment Company, with 31.1%, reflecting its establishment by the Al Ghurair family, which owns Al Ghurair Group, a diversified investment conglomerate. The bank had assets of Dh125.8bn ($34.2bn) as of the end of June 2017, which was up from its assets of Dh122.8bn ($33.4bn) at the end of 2016. Loans accounted for just under half of assets, at Dh62.4bn ($17bn).
Commercial Bank of Dubai is the fourth-largest banking institution based in Dubai. The Investment Corporation of Dubai is its largest shareholder, on a stake of 20%; the bank’s shares are also listed on the DFM. It reported assets of Dh67.9bn ($18.5bn) at the end of the first half of 2017, up from Dh64.1bn ($17.4bn) at the end of 2016 and Dh61.4bn ($16.7bn) in mid-2016. Loans, advances and Islamic financing accounted for Dh46.3bn ($12.6bn) of the total, up from Dh42bn ($11.4bn) at the end of 2016 and Dh40.6bn ($11.1bn) six months before that.
Noor Bank, another sharia-compliant institution, is both the smallest bank by assets headquartered in the emirate, and the youngest, having been established in 2008. The government of Dubai owns a 25.7% stake in the institution via the Office of the Crown Prince of Dubai and another 22.7% through the Investment Corporation of Dubai. The UAE’s sovereign wealth fund, the Emirates Investment Authority, owns a further stake of 4.7%. Noor Bank reported assets of Dh39.9bn ($10.9bn) as of June 2017, down from Dh40.6bn ($11.1bn) at the end of 2016. Islamic financing accounted for Dh27.8bn ($7.6bn) of the total, up from Dh25.9bn ($7bn) at the end of 2016.
The emirate’s investment banking sector has received support from a recent increase in major deals, such as mergers and acquisitions (M&A). Rajai Ayyash, managing director and Gulf regional executive for global client management at BNY Mellon, told OBG that the low oil price and geopolitical concerns had prompted regional governments to seek greater efficiencies, leading to increased M&A activity, citing the recent merging of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), as well as that of Abu Dhabi’s Mubadala Investment Company with that emirate’s International Petroleum Investment Corporation as examples.
The private sector has also recently witnessed some notable activity, including the agreement by global giant Amazon to purchase Dubai-based online retailer Souq.com in March 2017. “There should be two or three more years of restructurings ahead, which should continue to drive demand for related activities such as advisory and underwriting services,” Ayyash told OBG. However, Rohit Walia, executive chairman of local investment bank Alpen Capital, told OBG that while overall activity in the segment remained stable, transaction sizes were starting to become smaller. “There is a great deal of consolidation occurring, and there are always deals to be made, but the scale of individual M&A transactions is likely to fall compared to recent years” (see Capital Markets chapter).
Emirati banks operated 354 bank branches in Dubai as of October 2014, according to the most recent breakdown from the Central Bank of the UAE (CBU). This was the largest figure of any individual emirate and accounted for 40% of the national total of 892. The national total had fallen to 819 branches by April 2017.
The institution with the largest branch network in the emirate was Emirates NBD with 85 branches, followed by DIB with 39, and Mashreq Bank and Emirates Islamic with 32 each. Union National Bank, which is headquartered in Abu Dhabi, had the largest branch network in the UAE of any individual Emirati bank based outside of Dubai, with 21 outlets; however, FGB and NBAD, which merged in early 2017, had a combined 26 branches, suggesting the resulting institution, First Abu Dhabi Bank, is now the largest non-Dubai-headquartered player in the local market according to branch network size.
Foreign banks operated 48 branches in the emirate as of October 2014 – again, more than any other emirate – out of 115 foreign bank branches across the UAE as a whole. The nationwide figure fell to 85 by April 2017, partly as the result of the departure of two foreign institutions in 2014. The largest foreign player by branch network was Standard Chartered, with seven, followed by Habib Bank AG Zurich with five and Habib Bank with four.
Consolidation & Competition
There were 49 banks operating in the UAE as a whole as of April 2017, excluding purely wholesale banks, according to figures from the CBU, including 23 Emirati banks. The large number of banks in correlation to the size of the country means that consolidation is a constant theme of discussion in the market.
One barrier to this is that many banks have a strong local identity, and in many cases are part- or majority-owned by the government of their emirate, which would make inter-emirate mergers difficult. However, industry figures say there are nonetheless opportunities for further mergers within individual emirates.
Abu Dhabi witnessed a major instance of such consolidation in early 2017 when NBAD merged with fellow Abu Dhabi-headquartered institution FGB. The new institution had total assets of Dh624.6bn ($170bn) at the end of the first half of 2017, equivalent to 23.5% of total federal banking assets, making it a powerful player in the national market and thereby intensifying competition for large Dubai-based banking institutions. “The number of banks for a population of this size is relatively high, so continued consolidation would make sense,” Julian Wynter, CEO of Standard Chartered Bank UAE, told OBG. “However, there are a wide range of factors at play, and banks will likely see how the NBAD/FGB merger works out before deciding whether to follow suit.”
Redmond Ramsdale, senior director for financial institutions at Fitch Ratings, said that competition from banks headquartered in other emirates was generally on the rise in Dubai. “Abu Dhabi- and Sharjah-based banks in particular are becoming increasingly active in Dubai, as it is becoming the most diversified economy within the UAE and witnessing comparatively strong growth, while the Abu Dhabi government is still pursuing a policy of fiscal austerity,” he told OBG, noting that the dynamic had been reversed several years prior.
Total gross banking assets for banks situated throughout the entire UAE came to Dh2.7trn ($722.5bn) at the end of June 2017, according to figures from the CBU, an increase of 1.6% since the start of that year and 5.4% on the same period a year before that, when the figure stood at Dh2.5trn ($685.5bn). The IMF placed the value of combined national banking sector assets at the equivalent of 204% of GDP as of the end of March 2017.
The combined assets of the six Dubai-headquartered banks amounted to Dh909.7bn ($247.6bn) at the end of 2016, up from Dh822.1bn ($223.8bn) a year earlier, according to the banks’ reported assets. This amounted to 34.8% of total national banking assets, up from 31% at the end of 2015, pointing to more rapid growth in the assets of Dubai-based institutions than across the country as a whole: Dubai-based banks’ asset base grew by 10.6% over the year, compared to an average of 5.4% for all UAE banks. The assets of Dubai-headquartered banks grew by 3.7% from end-2016 to mid-2017 to reach Dh943.4bn ($256.8bn), compared to 1.6% for the national banking sector.
Bank lending dominates financing in the UAE, with bilateral bank loans accounting for around two-thirds of total credit, according to the CBU. Syndicated loans are the next largest source of lending, followed by bond and sukuk issuances. The domestic corporate bond and sukuk market is small, owing to the absence of a local government bond issuance market, which leaves investors without a local currency yield curve on which they could calculate the costs of corporate debt issues.
Total lending by UAE banks was worth Dh1.6trn ($433.2bn) at the end of June 2017, up 3.1% y-o-y and 1% since the beginning of the year. Private sector lending accounted for Dh1.1bn ($294.1bn) of the total: Dh728.6bn ($198.3bn) to enterprises and Dh351.9bn ($95.8bn) to retail clients. Lending to the government stood at Dh177.9bn ($48.4bn), and lending to government-related entities was Dh179bn ($48.7bn).
Domestic lending is dominated by credit provision to corporations, which accounted for around two-thirds of lending in 2016, on a figure of Dh913bn ($248.5bn), up 6.5% on 2015. Lending to households grew by 5% in 2016, to Dh347bn ($94.5bn). While corporate lending outpaced the retail market during the year, lending to households and Islamic lending has been growing at a faster rate in recent years at major banks in the emirate, albeit from a lower base.
The IMF expects bank lending growth rates in the UAE to accelerate in the coming years, driven in particular by increased credit to the construction, hospitality and tourism industries as Expo 2020 approaches. “The sector’s appetite for lending is improving,” Vineet Kumar Dudeja, CEO of the UAE unit of India-headquartered Bank of Baroda, told OBG. “Some banks have stopped lending to SMEs, but overall the industry is coming back to life after a period of somewhat more subdued levels of activity.”
Shabbir Malik, director of equity research at Egypt’s EFG Hermes, told OBG that the Dubai banking market in particular will benefit from this increase in lending rates. “The overall growth outlook for the UAE is weak, but Dubai’s prospects are better as it has been spending on infrastructure and tourism development ahead of Expo 2020. We expect relatively strong credit appetite in the country during the period leading up to the flagship event,” he told OBG.
As in many jurisdictions, SMEs face difficulties accessing bank credit in Dubai. According to figures from the Abu Dhabi-based Khalifa Fund for Enterprise Development, between half and 70% of UAE-based SMEs have had applications for bank loans rejected, and many do not apply in the first place. While SMEs account for around 60% of the UAE’s GDP, they make up a much smaller proportion of bank lending, at 4% of outstanding bank credit, according to the Khalifa Fund. Standard Chartered’s Wynter said that high compliance requirements helped to limit access to the market for smaller firms. “Small, family-owned companies face a lot of challenges in setting up accounts and accessing credit,” he told OBG.
Sudhir Kumar, senior partner at professional services firm Morison Menon, however, said that access depended on a variety of factors, including experience, and that many smaller companies could access credit. “SMEs that keep proper books and have more than three years of successful trading will be able to work with banks,” he told OBG. “Access also depends somewhat on a company’s sector of activity; for example, at the moment some banks are not keen on electronics and white goods trading firms as the market is extremely competitive,” he added.
Stable & Liquid
In its most recent Article IV consultation for the country, the IMF described the UAE banking sector as “sound and liquid, with stable and fully provisioned NPLs”, pointing out that banks remained “well capitalised and liquid” throughout the post-2014 economic slowdown.
Liquidity in the national banking system depends to a substantial extent on oil prices – though this is somewhat less the case in Dubai specifically – which influence the size of government deposits in the system. Liquidity consequently tightened in 2015 as oil prices fell, with expectations in some quarters that further tightening would occur in 2016.
However, liquidity has instead received support from a partial recovery in the price of oil. While the price of West Texas Intermediate crude hit a low of less than $30 per barrel in February 2016, it had recovered strongly by the middle of 2016 and was hanging around $60 per barrel at the beginning of 2018.
This increase in liquidity has supported both regional and national economic growth, as well as the national banking industry. “From mid-2015 we saw a real tightening in liquidity in the UAE banking sector, with net interest margins also deteriorating,” Ramsdale told OBG. “However, the liquidity situation is in the process of improving for two reasons. First, banks have slowed down in lending and are therefore under less pressure to rapidly grow their deposits. Second, government deposits have also started flowing back into the banking sector, through, for example, the Abu Dhabi Investment Authority, as the oil price has improved and the government has been issuing debt.”
The CBU is currently in the process of introducing Basel III requirements for the sector, which it aims to fully implement by the end of 2018. The framework’s capital adequacy ratios were introduced in March 2017, with the sector as a whole currently comfortably exceeding them; the Tier-1 and Tier-2 capital adequacy ratio stood at 18.5% of risk-weighted assets at the end of June 2017, according to central bank figures, compared to a Basel III minimum requirement of 10.5%, while the Tier-1 capital adequacy ratio stood at 16.9%, or twice the minimum requirement of 8.5%. Recent stress tests suggest that most banks in the UAE, including all large institutions, would remain adequately capitalised in the face of adverse conditions.
The bank is now in the process of introducing the framework’s liquidity coverage ratio (LCR), and is currently applying an 80% LCR requirement at the country’s three largest banks, to be increased to 100% in 2019. The sector’s eligible liquid asset ratio stood at 17.1% at the end of June 2017, according to central bank figures. The regulatory framework’s net stable funding ratio requirements are similarly expected to be applied to the banking sector in 2018.
The central bank is also working on other regulatory reforms in addition to Basel III. Prominent among these are new corporate governance rules due to be issued in 2018 that, alongside other changes, are expected to oblige banks to nominate independent administrators to their boards of directors. The central bank also has longer-term plans to establish a new framework for the resolution of insolvent institutions.
One challenge for local banks that the Basel III era will bring is liquidity management. The framework’s rules require banks to keep a significant proportion of their assets in the form of high-quality liquid assets. At the moment, options to do so are largely limited to central bank certificates of deposit; however, these certificates offer low yields, meaning that increased liquidity requirements could impact banks’ profitability.
A potential solution to this is a mooted federal government plan to begin issuing local currency-denominated bonds and sukuk, which would likely be highly liquid; banks would also potentially have the option of temporarily selling these to the central bank under repurchase agreements, or repos, further boosting liquidity. Industry figures say that this may be one of the key aims of the plan. Domestic government debt issues would also provide banks with a benchmark against which they could price loans, and could serve as instruments they could use as collateral for interbank deals and borrowing from the central bank, further boosting the development of the industry.
The move may increase competition, however. In addition to helping banks price their own loans, a domestic government bond market would create a yield curve that would facilitate the development of a local corporate debt market, offering companies a wider range of financing options beyond bank funding (see Capital Markets chapter).
Meanwhile, the central bank is considering making changes to its liquidity management framework. In a July 2017 report, the IMF suggested that the institution should consider transforming its certificates of deposit from a daily tap facility to auctioned, transferable securities that could be traded between banks, as well as defining a new interest rate corridor. The latter could be achieved by unifying current liquidity facilities into a single overnight lending rate, which would serve as its ceiling, and create an overnight deposit rate, which would act as its floor.
Concentrated Lending & Systemic Risks
undefined Concentration risks are comparatively high in the UAE banking sector and wider region, owing in part to the predominance of relatively small populations compared to the size of local economies. This has meant that corporate banking tends to be better developed than retail banking, leading to large concentrations among major clients with regard to both deposits and loans. Prominent among these are governments, with government and government-related entities (GREs) accounting for around 24% of deposits in the UAE banking system as a whole as of mid-2016, according to figures from Moody’s Investors Service. Larger banks tend to have more concentrated exposures, particularly in relation to the government and GREs.
This is especially the case in Dubai, where GRE debt was worth about 60% of the emirate’s GDP in 2016, according to figures cited by the IMF, although this was down 10 percentage points from the previous year. According to Moody’s, as of September 2016 lending to related parties accounted for 45% of net loans and advances at Emirates NBD – the government is a related party to the bank because of its state-owned nature; though this figure does not appear to include lending to GREs, which accounted for 6% of the bank’s loan book at the end of 2015. In contrast to many other Emirati banks, such related lending has been on the rise at Emirates NBD in recent years.
The federal authorities are working to introduce new restrictions on concentrated lending by banks, which industry figures expect to be implemented in 2018. However, observers say that some are likely to struggle to diversify their portfolios in time to meet the deadlines, suggesting they will need to apply for exemptions from some of the new requirements.
As part of its efforts to bring in Basel III regulatory standards, the CBU has also been working on a framework to identify systemically important banks. Institutions identified as systemically important will be required to hold additional common equity Tier-1 capital in addition to standard capital adequacy requirements. The amounts will depend on the importance of the banks and will rise as the completed implementation of Basel III nears, hitting their full levels of between 0.5% and 2% from 2019 onward, when the framework has been fully implemented. The CBU plans to impose other additional measures on such banks, including tighter liquidity requirements and a more intense inspection regime.
The UAE banking sector saw an increase in NPLs following the 2008-09 crisis, with the Dubai banking industry among the worst hit. NPL rates have, however, been falling in recent years thanks to the resolution of legacy problems from the crisis through loan restructurings and settlements, with banks liquidating collateral they held against bad loans as property prices have recovered; this has led to improved risk profiles across the sector and increases in profitability as provisioning expenses have fallen.
However, some observers say that a handful of major legacy loans from the crisis remain problematic, with restructuring deals that involve debtors just paying off interest rather than any principle, amounting to a mere displacement of the problem. As a result, the problem loan ratio is in practice substantially higher than official NPL figures suggest. The federal NPL rate stood at 5.3% at the end of the first quarter of 2017, according to IMF figures, more or less unchanged on 2016 and 2015, but down from 5.6% in 2014 and 6.7% the year before that. Wynter told OBG that oil and gas, construction and general trading had recently experienced higher loan impairment rates. However, he said he was beginning to see an improvement in the credit quality of trading firms, and that credit markets for such firms were beginning to loosen as a result, after months of tightening. The SME segment has also been witnessing a sharp rise in NPLs in recent years, though its small size as a proportion of bank lending means the wider impact of this on the financial system has been limited (see analysis).
Recent rises in interest rates have applied some pressure on banking profit margins. “Emirati banks have been actively repricing the assets side, but there is always a bit of a time lag between such repricing and the cost of liabilities going up; furthermore, it is not always possible, as banks may not want to change their prices if it means losing a customer,” Ramsdale told OBG. However, he said that overall the current environment is beneficial to the sector. “A large share of bank funding comes from current accounts and savings accounts that predominantly do not pay interest, and as rates rise there is less migration from current to term accounts than you might expect; so rising interest rates mean a rising gap between funding and lending costs, and increased profits,” Ramsdale said.
Lending activity is expected to rise as the approach of Expo 2020 is driving increased economic activity and investment, creating new financing needs. This will deepen interest from banks based in other emirates, pushing up competition in the sector, which may in turn heighten the appeal of consolidation in the crowded national banking industry. Throughout this shift the sector will remain a major banking hub in the region, with developments such as financial technology initiatives helping it to further increase levels of sophistication as well as access to credit.
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