The Central Bank of the UAE enhancing its banking regulatory framework

Showing their strength in 2015, Abu Dhabi’s banks maintained both asset growth and profitability in the face of lower oil prices and regional unrest. External factors are expected to result in challenging market conditions in 2016, however, ample capital buffers and one of the most respected regulatory structures in the region mean that the sector is well positioned to expand as and when opportunities present themselves.

Regional Giant

The UAE banking system is the largest in the region, having surpassed that of Saudi Arabia some years ago, with total assets of Dh2.47trn ($672.3bn) as of December 2015, according to central bank data. These assets are deployed both within the federation through lending activity to residents and non-residents, the public sector and corporations, and also across the GCC, the traditional destinations of Europe and America, as well as the world’s emerging markets.

The UAE banking sector’s ascent to its current position as both a domestic economic driver and a global player has been rapid. The nation established its currency only as recently as 1973, having previously relied on the Bahraini dinar and the Qatar/ Dubai riyal for cash transactions. The new currency and the fledgling banking system were first overseen by the Currency Board, which spent the subsequent years working with the IMF to produce the annual reports and bi-annual bulletins that tracked the early progress of the sector. A rapidly expanding banking industry, growing largely on the back of the UAE’s booming hydrocarbons sector, soon necessitated a comprehensive regulatory framework.

The transformation of the UAE Currency Board into the Central Bank of the UAE (CBU) took place with the issuance of Union Law No. 10 of 1980 Concerning the Central Bank, the Monetary System and Organisation of Banking. The law which established the new body granted it a wide array of powers, including the formulation of monetary, credit and banking policies – roles which it retains to this day.

Since its establishment the CBU has overseen a rapid rise in economic activity, with cash in circulation expanding from Dh2.4bn ($653.3m) in 1980 to Dh456.9bn ($124.4bn) as of December 2015, CBU data shows. The CBU has now turned its attention to synchronising its regulatory framework with the new global standards that have arisen as a result of the global economic crisis.

Market Structure

Today, Abu Dhabi’s banks operate in one of the most vibrant sectors in the Middle East, thanks largely to the federal nature of the UAE, which means that they compete directly with lenders based in the nation’s other financial capital, Dubai. As of December 2015, the domestic market consisted of 23 locally incorporated banks, which between them operated 874 branches and 37 electronic service units – the increasingly popular facilities stocked with ATMs and computer kiosks which allow for online account consultations and a number of pre-defined transactions.

Foreign Players

The CBU also records that six GCC banks are licensed to conduct business in the UAE, operating a head office each as well as four additional branches. A total of 20 foreign banks are also licensed, and between them they have 82 conventional branches and 44 electronic service units.

The large branch networks and brand strength of the more significant locally incorporated players, however, has proved difficult for foreign players to compete with. Royal Bank of Scotland, Lloyds, Barclays and Standard Chartered have all either ceased or reduced their retail operations in the UAE over recent years, usually as part of a wider global retrenchment, in a trend that has further strengthened the position of the country’s highly liquid and frequently state-owned institutions. In some cases foreign banks have re-calibrated their UAE operations towards niche segments and wholesale banking, such as Lloyds Banking Group’s decision to sell its onshore retail, commercial and corporate business to HSBC Bank Middle East, while retaining its international wealth business in the UAE.

Wholesale & Others

A total of eight wholesale banks are also licensed. These institutions are permitted to carry out all commercial activities, such as offering lending facilities and letters of credit to companies, but cannot have retail operations.

A further 121 financial institutions have established representative offices in the country, while yet more sector competition comes in the form of 26 finance companies and 25 financial investment firms. This means that as well as being the largest banking sector in the GCC, accounting for approximately 38% of the region’s total assets in 2015, it is also one of the most fragmented.

National Bank Of Abu Dhabi (NBAD)

Abu Dhabi’s banks play a leading role within this diverse and competitive industry, vying for business with both domestic giants and the foreign players that have established a foothold in the market. NBAD is largest of the local lenders, with total assets of Dh406.6bn ($110.7bn) at the end of 2015.

The bank runs the largest loan book in the emirate, valued at Dh205.9bn ($56.1bn). Majority-owned (70%) by the emirate’s government through the Abu Dhabi Investment Council (ADIC), it has been at the centre of Abu Dhabi’s economic development since its establishment in 1968.

As a universal bank NBAD covers global retail and commercial banking, global wholesale banking, global financial markets, global wealth, and Gulf and international division which includes networks in eight Arab countries and further branches or representative offices in the UK, France, Switzerland, the Channel Islands, the US, Hong Kong, China, Malaysia, India and Brazil – giving it the largest international presence among UAE banks. The appointment of a new CEO in 2013 brought with it a fresh strategic direction: the bank’s intention to increase its activities in the “West-East Corridor”, which it defines as a vast geographical span from West Africa to East Asia, provides a potential growth model for other UAE banks in expansionary mode.

Abu Dhabi Commercial Bank (ADCB)

ADCB is the second-largest bank in the local market, with total assets of Dh228.3bn ($62.1bn) as of the end of 2015. Like NBAD, the bank is linked to the state by the sizeable interest (58.08%) held by ADIC. Formed in 1985, ADCB established itself principally as a wholesale business in the first phase of its growth, but more recent years have seen it expand its operations to emerge as a strong retail player in the domestic market with 48 branches, four pay offices and 306 ATMs across the UAE. As part of this effort it has invested heavily in alternative channels, such as online banking, and deployed retail-centric corporate imaging. The bank’s expansion strategy has been largely focused on organic growth within the UAE, which has included the establishment of a sharia-compliant component, ADCB Islamic Banking, but it has also moved to expand abroad, opening two branches in India, a branch in Jersey and representative offices in London and Singapore.

First Gulf Bank (FGB)

With assets of Dh227.5bn ($61.9bn) at the end of 2015, FGB is the third-largest bank in Abu Dhabi. As of June 2015, 86.6% of the publicly listed company was owned by UAE companies and individuals, with foreign investors (11.3%) and other GCC nationals (2.1%) accounting for the remainder. Incorporated in 1979, the historically retail-focused institution has developed a universal set of services, encompassing the core revenue drivers of wholesale and consumer banking, as well as the incremental revenue streams derived from treasury and global markets and a range of subsidiaries and associate companies. The latter include a number of regional banking, asset management and real estate interests, such as First Gulf Libyan Bank, First Gulf Properties, Aseel Finance, Dubai First, Mismak Properties, First Merchant International and Radman Properties.

The bank also maintains representative offices in London, Seoul, India and Singapore, and is currently implementing a three-pillar strategy by which it intends to pursue organic growth in the domestic market, undertake selective regional and international expansion focused on financial flows between the UAE and target markets, and exploit synergies with its numerous subsidiaries and associates. The bank also offers sharia-compliant products through its Islamic window, Siraj.

Abu Dhabi Islamic Bank (ADIB)

With total assets of Dh118.4bn ($32.2bn) as of the end of 2015, ADIB is the fourth-largest of Abu Dhabi’s “big five” banks in terms of assets. Established by the government of Abu Dhabi in 1997, it is also the largest sharia-compliant bank headquartered in the emirate and the second-largest in the UAE.

The bank’s major shareholders include ADIC, which retains a 7.6% stake, and Emirates International Investment Company, which has a 40.4% holding. More quasi-sovereign backing comes from the stake held by the UAE General Pension and Social Security Authority (1.2%).

In 2008 the arrival of a new management team resulted in the implementation of a growth strategy built around three pillars: to establish itself as a market leader in the UAE by developing its private banking, personal banking, business banking and wholesale banking components around a proposition of ethical banking; to create an integrated financial services group and capitalise on the synergies to be found within its diversified offerings; and to pursue growth opportunities outside its core customer base and home market.

Accordingly, the bank has been in acquisitive mode in recent years, in 2014 purchasing a 51% stake in Arab Link Money Exchange, establishing the Abu Dhabi Islamic Merchant Acquiring Company and acquiring the retail banking business of Barclays Bank in the UAE. In the domestic market the bank currently operates 88 branches, including a 24-hour branch at Abu Dhabi International Airport, and 757 ATMs. The bank has also extended its brand overseas, with a presence in the UK, Saudi Arabia, Qatar, Iraq, Sudan and Egypt.

Union National Bank (UNB)

Abu Dhabi’s fifth-largest lender, UNB, posted total assets of Dh101.9bn ($27.7bn) as of the end of 2015. Established in 1982, UNB’s ownership structure is unique in the local market in that it is the only bank in the country to be jointly owned by the governments of Abu Dhabi and Dubai. The UNB Group also includes one of the oldest brokerage firms in the UAE as a wholly owned subsidiary, while its Al Wifaq Finance Company offers sharia-compliant financial, commercial and investing services to both organisations and individual customers The bank provides a full array of wholesale and retail banking services through its network of 72 branches distributed across the nation. Its Islamic financing activities are carried out both through the Al Wifaq subsidiary and at Islamic windows in its conventional network, five of which were added to the system in 2014. Its international footprint, meanwhile, includes regional interests in Egypt, Kuwait and Qatar, as well as in China.


Subdued oil prices in 2015 have focused attention on the performance of the UAE banking sector, as well as that of the wider economy. The nation’s banks have, in the past, demonstrated their resilience to adverse economic conditions, exhibiting a robust performance in the face of the global economic crisis of 2008 thanks in large part to the high capital adequacy ratios (CARs) encouraged by the CBU’s prudent regulatory framework. Recent years have been characterised by high levels of liquidity as well as sustained sector growth.

Despite the oil price drop in the second half of 2014, banks in the UAE continued to enjoy the benefit of improving investor sentiment on the back of such developments as the MSCI country upgrade from “frontier” to “emerging market” status and the awarding of World Expo 2020 to Dubai.

According to the statistical bulletin of the CBU, sector bank assets increased by 9.7% over 2014 to reach Dh2.31trn ($628.8bn), while lending grew by 10.1% over the same period and deposits expanded by 11.1%. Abu Dhabi’s leading financial institutions were at the forefront of this positive trend.

An OBG analysis of the capital’s big five banks shows that their aggregate total assets grew from Dh893.8bn ($243.3bn) to Dh997.7bn ($271.6bn) during 2014, an expansion of around 12%.

Lending and customer deposits, meanwhile, were up by 8% and 10%, respectively. The year was also a profitable one for Abu Dhabi’s lenders, with aggregate net profit rising 18% year-on-year to reach Dh19.3bn ($5.3bn).

In 2015, however, a different market dynamic emerged. While local lenders remained profitable, the effects of a sustained drop in oil prices materialised in both balance sheets and income statements. The most significant change was the slowdown in deposit growth as a result of the government drawing down reserves to meet its spending commitments. Consequently, the pattern by which deposit growth has outstripped lending expansion over recent years has been reversed.

In the first nine months of 2015 the aggregate deposits of Abu Dhabi’s big five declined by around 1%, from Dh676.4bn ($184.1bn) to Dh669.1bn ($182.1bn), while loans and advances continued to grow at a rapid 10%, expanding from Dh602bn ($163.9bn) to Dh662.7bn ($180.4bn).

The banking sector, therefore, is moving from a phase of high liquidity to one of potentially constricted liquidity, and the ability of banks to grow their businesses in this new liquidity scenario will be the central question of 2016 (see analysis).

Strategies, naturally, will depend upon each individual bank’s geographical footprint, balance sheet strength and appetite for risk. “With banks competing for liquidity, it is going to be a challenging year,” Rola Abu Manneh, senior managing director of client relationships, NBAD’s wholesale banking, told OBG. “We are observing an increase in rates offered by the regional banks. However, at NBAD, we are leveraging our strong global footprint and attracting liquidity from international entities that are more focused on ratings than interest rates.”

Banking Sector Stability

While the short-term outlook for Abu Dhabi’s banks is a challenging one in terms of business expansion, they enter this period from a position of strength. According to the most recent figures from the CBU, for September 2015, the CAR for the UAE banking sector stood at 18.3%, with a Tier 1 ratio of 16.5% – comfortably above the Basel III capital requirements.

In terms of asset quality, the non-performing loans (NPLs) of UAE banks have declined from over 8% of gross loans in the first half of 2014 to 6.3% in the fourth quarter of 2015.

As NPLs have declined, UAE lenders have broadly held their provisions in place, resulting in an improved coverage ratio of 102% at the close of 2014, compared to 92% a year earlier. Particularly significant with regard to the liquidity threat is the robust funding profile of the nation’s banks, with a loan-to-deposit ratio of less than 100% and a limited reliance on foreign and capital market funding. The liquid assets ratio stood at 17.4% as of Q4 2015.

Finally, while the UAE banking sector has increased its exposure to foreign markets by establishing branches and subsidiaries, or by taking stakes in foreign institutions, this presents limited financial stability concerns due to the fact that the banks are well diversified and are primarily active in the GCC, major financial hubs and core trading partners.

Sector Regulation & Reform

The financial soundness of the UAE’s banking sector is largely due to the effectiveness of the regulatory framework implemented by the CBU. Since the global economic crisis of 2008 the CBU has worked to address systemic risk, such as by improving the framework through which banks are able to evaluate their portfolio of loans and advances to reflect asset quality (the Provisioning Circular of 2010), and by more closely regulating retail lending by establishing lending caps and fee limits (the Regulations No. 29/2011 Regarding Bank Loans & Other Services Offered to Individual Customers).

Macroeconomic stress testing has been introduced to assess the capacity of UAE banks to withstand a severe yet plausible deterioration in macroeconomic conditions.

The approach is in two parts, the first being a bottom-up approach, where economic scenarios are given to banks along with general assumptions and they are asked to apply them on their own portfolios and report the results back to the central bank. Following that, a top-down approach is used, where the central bank performs a uniform stress test based on data collected from banks.

The outcome of the two tests is compared to reach a conclusion as to the banks’ risk exposure and adequacy of their capital positions, as mentioned in the latest Financial Stability Report.

Addressing Exposure

More recently, the CBU has moved to address the risk of banks’ exposure to mortgage lending and large exposures to government-related entities (GREs). In October 2013 it issued Regulations regarding Mortgage Loans, which provide a framework for banks providing mortgage lending in the UAE. Included in the regulations is a requirement for banks to adhere to maximum debt burden and loan-to-value ratios when granting mortgages. In November 2013 the CBU set a limit of 100% of the capital base for all lending by a bank to governments of the federation and their non-commercial entities, and 25% to individuals.

After consultation with banks, an initial deadline was set aside in favour of a five-year grace period during which banks are allowed to reduce their balance sheet exposure to GREs by 20% per annum until the required level is attained.

In 2015 the CBU turned its attention to the issue of liquidity, introducing a liquid assets ratio on July 1, 2015 as a first step towards its ultimate objective of implementing the liquidity standards of Basel III. As of January 2016, approved banks will therefore start the transition to Basel’s liquidity coverage ratio (LCR), designed to ensure that banks have sufficient high-quality liquid assets to match the anticipated net cash outflows during a 30-day stress scenario.

Next on the CBU’s agenda is the introduction of Basel’s net stable funding ratio (NSFR), a measure concerned with the longer-term stability of banks’ liquidity positions, and which is set to take place in January 2018. The CBU’s implementation of the LCR and the NSFR, combined with the slowdown in deposit growth exhibited by the sector, ensures that the question of liquidity will remain a salient one over the coming year (see analysis).


Regulatory change will continue to exercise the banking sector over 2016, as lenders adjust to the new framework. The CBU’s focus will be the ongoing development of the capital policy for migrating the banks to the Basel III capital framework and new risk-management regulations.

Looking further ahead, a larger regulatory question mark remains in the form of a proposed Financial Service Law. While the legislation exists only in draft form, it raises the possibility of a “Twin Peaks” system for the UAE, by which the CBU is likely to play the role of prudential regulator, and the Securities and Commodities Authority that of the conduct-of-business regulator.

The larger concern for Abu Dhabi’s banks, however, are the downside risks presented by low oil prices, identified by the CBU as a slowdown in the real estate sector, more volatile securities markets and added uncertainties about exposure to business partners in adversely affected oil-dependent economies. The anticipated tightening of liquidity in the sector is likely to result in increased pricing competition between lenders in 2016.

“As the cost of funding increases, so does competition, so pricing is the battleground at the moment,” Deepak Khullar, group chief financial officer at ADCB, told OBG.

Looking to growth prospects, the expansion of UAE market volume is likely to be lower in 2016, according to NBAD’s outlook for the year, with banks adopting a more conservative stance that will result in more moderate returns. Credit extended to small and medium-sized enterprises (SMEs) is likely to be the most adversely affected segment of the aggregate loan book, as banks retrench from a period of elevated SME lending. “In 2012 and 2013 UAE banks really started to target SMEs. In 2014 there was very successful SME lending growth, but SMEs became overleveraged. In 2015 we are already seeing a correction,” Mahdi Mandoh Kilani, head of business banking at ADIB, told OBG.

Despite the challenges facing the sector in the short term, however, optimism remains high regarding the medium- to long-term outlook: high CARs and solid loan books mean that Abu Dhabi’s lenders are well positioned to ride out the near-term liquidity challenge, while attention is already turning to local and international developments which have the potential to reinvigorate the market. These factors include the projects attached to the Dubai Expo 2020 and the opening up of Iran to increased trade and investment activity with the easing of the international sanctions regime, as well as the possibility of an oil price recovery in late 2016 or 2017.

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The Report: Abu Dhabi 2016

Banking chapter from The Report: Abu Dhabi 2016

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