As part of the UAE’s globally connected economy, Abu Dhabi’s banking sector has benefitted from the country’s robust growth in both its oil and non-oil sectors. The emirate’s lenders are well capitalised, and experiencing solid credit growth and profitability. They have also embraced technological innovation and financial technology (fintech) – as has the Central Bank of the UAE (CBUAE) – while the emirate’s financial free zone has witnessed additional buoyancy despite global headwinds.
The UAE has been strengthening its cybersecurity regime in recent years, as well as taking significant steps to combat money-laundering and other forms of illegal financing. Abu Dhabi‘s banks have made efforts to improve in terms of environmental, social and corporate governance, and sustainable finance. Considering the risks facing the international business environment, Abu Dhabi and the UAE have maintained stability and continuity in banking and finance, rebounding strongly from the effects of the Covid-19 pandemic and the Russia-Ukraine conflict.
Local Market
Because of Abu Dhabi’s status as one of the UAE’s seven emirates, banks operating within it are subject to regulatory laws at the national level. These regulations stem from two pieces of legislation: Federal Law No. 14 of 2018, which is the main law covering banking and financial services, and Emirates Securities and Commodities Authority (SCA) Law No. 4 of 2000. The first, which sets out the structure and responsibilities of the CBUAE, among other regulations, applies to all banking operations, except those undertaken within the UAE’s financial free zones or by financial institutions that are regulated by the authorities of such zones. The SCA governs financial markets, listed companies and brokers at the federal level. As listed entities, Abu Dhabi’s banks are subject to SCA regulations. The SCA also supervises the self-regulated Abu Dhabi Securities Exchange (ADX).
The UAE has several free zones, with the offshore economic zone Abu Dhabi Global Market (ADGM) the emirate’s primary example. ADGM is governed by regulations issued by the Financial Services Regulatory Authority (FSRA) that are modelled after the laws of the United Kingdom instead of domestic statutes. Both the CBUAE and SCA issue regulatory updates periodically, and Abu Dhabi banks must keep abreast of the latest regulations. However, the FSRA’s updates apply only to entities operating within ADGM. Another key unit is the Financial Intelligence Unit, an independent anti-money-laundering supervisor that is subject to CBUAE oversight. Specific responsibility for the sector falls within the purview of the CBUAE’s Supervision Department, which ensures that licensed institutions comply with existing regulatory requirements.
In 2022 the statutory capital adequacy ratio (CAR) was 10.5%, the Tier-1 ratio was 8.5% and the common equity Tier-1 ratio was 7%, all excluding the capital conservation buffer, which adds 2.5 percentage points to each figure. These requirements are in line with Basel III capital standards, and as of April 2023 the UAE had yet to announce any plans to implement Basel IV, although some of its elements – such as the standardised approach for counterparty credit risk – are already in place. In the first quarter of 2023 the CBUAE established Sanadak, a customer complaints unit for the financial sector. The central bank also has a Consumer Protection Department to help banks resolve disputes with customers.
Shareholder Structure
Government-owned banks are mandated by law to be public joint stock companies, and the UAE via the Emirates Investment Authority is entitled to a 5% stake in every public joint stock company. Many local banks operating in Abu Dhabi and elsewhere in the UAE have much larger public ownership stakes, albeit these shares are often held via sovereign wealth funds. In addition, national shareholders must own at least 60% of a local bank, although no one person can own more than 5% without CBUAE approval.
There are no set limits for foreign ownership, although such control of a locally incorporated bank cannot in practice be more than 40% given the existing stipulation that 60% of a respective entity must be held by local shareholders.
The Abu Dhabi and UAE banking sectors contain both conventional and Islamic banks, with the latter subject to the Higher Sharia Authority (HSA), which aims to harmonise the standards and practices of UAE-based institutions with their international peers. The HSA has the power to determine the rules, general principles and standards for Islamic finance of all kinds, while also overseeing such banks’ own internal sharia supervisory committees. One of the authority’s various tasks is to promote the UAE as a global centre for Islamic finance.
Regarding fintech, the CBUAE, SCA and FSRA, along with the Dubai Financial Services Authority, worked together to establish guidelines for artificial intelligence (AI), big data analytics, biometrics, cloud computing, distributed ledger technology and application programming interfaces. The guidelines established best practices for implementing related technologies. In November 2020 the CBUAE launched the Fintech Office to develop and implement a strategy for this area. The UAE Banks Federation, established in 1982, is the sector’s professional body, with 56 member banks and financial institutions as of September 2023.
Sector Players
The country’s largest banks are based in Abu Dhabi and Dubai. As of April 2023 First Abu Dhabi Bank was the largest bank in the UAE by total assets, as well as the second-largest in the Middle East and Africa, according to Standard & Poor’s (S&P) Global Market Intelligence unit. The same list had Abu Dhabi Commercial Bank as third in the UAE and 10th in the Middle East and Africa. The two also came in fifth and seventh, respectively, in economic intelligence publication The Banker’s 2022 list of the strongest lenders in the Middle East, which is based on institutions’ Tier-1 capital.
As of the second quarter of 2023 First Abu Dhabi Bank had long-term credit ratings of “Aa3” from Moody’s and “AA-” from S&P. Abu Dhabi Commercial Bank’s ratings were “A” from S&P and “A+” from Fitch, both with stable outlooks. Abu Dhabi Islamic Bank (ADIB), the emirate’s largest sharia-compliant lender, was rated “A2” by Moody’s and “A+” by Fitch. In the second quarter of 2023, First Abu Dhabi Bank’s total assets totalled around Dh1.1trn ($299bn), while Abu Dhabi Commercial Bank’s assets stood at Dh521bn ($142bn). At the same time, ADIB’s total assets stood at around Dh182bn ($49.5bn).
First Abu Dhabi Bank is the result of a 2017 merger between First Gulf Bank and the National Bank of Abu Dhabi, and it has a strong public shareholding. Sovereign wealth fund Mubadala Investment Company (Mubadala) had a 37.9% stake in the bank as of the second quarter of 2023, while members of the emirate’s ruling family held a total of 15.8%, and other UAE entities and individuals controlled 29%. The bank also has overseas branches and subsidiaries, with private banking arms in Geneva, London, Paris and Singapore. Abu Dhabi Commercial Bank was created by the May 2019 merger between the bank and Union National Bank, with the new entity going on to acquire Al Hilal Bank in December 2019, although Al Hilal Bank operates as a separate Islamic finance entity within the group. As of the end of the second quarter of 2023 Mubadala owned more than 60% of the bank’s shares. Emirates International Investment Company, an Abu Dhabi-based venture capital firm, owned 39.4% of ADIB at the end of the second quarter of 2023, while Mamoura Diversified Global Holding, a debt-issuing entity under Mubadala, controlled just over 7.6%. As all three banks benefit from government support, they have some of the strongest credit ratings in the MENA region. Both Abu Dhabi Commercial Bank and ADIB also have established digital banks.
All three banks are also listed on the ADX, which is the preferred listing destination for many banks from the UAE’s emirates. The ADX features Sharjah-based entities Bank of Sharjah, Invest Bank, Sharjah Islamic Bank and the United Arab Bank; Commercial Bank International, National Bank of Umm Al Quwain, National Bank of Fujairah and National Bank of Ras Al Khaimah. The ADGM economic zone has 13 banks listed in its public register, many of which are private financial institutions. However, the list includes global giants like Citibank, HSBC Bank Middle East and Standard Chartered.
Digital Entities
The entry of Abu Dhabi-based digital lenders Wio Bank and Zand Bank in the banking sector has diversified its offerings. Wio Bank, which launched in September 2022 and is jointly owned by Abu Dhabi holding company ADQ (formerly Abu Dhabi Developmental Holding Company), Alpha Dhabi Holding, telecommunications company e& (formerly Etisalat) and First Abu Dhabi Bank, is concentrating on lending to small and medium-sized enterprises (SMEs). The bank has total invested capital of Dh2.3bn ($626m) and offers a full range of services, from opening accounts and making transfers, to online apps. Zand Bank, which in April 2021 announced its intention to be the world’s first digital bank to provide both retail and corporate banking services, is backed by UAE-based Al Hail Holding, Indian conglomerate Aditya Birla Group and US-headquartered Franklin Templeton, among others. In February 2023 ADGM announced a partnership with Zand to support UAE-based technology SMEs. In addition, Zand operates a digital platform for these companies called SME souk.
Performance
Resilience and depth have been two key characteristics of the Abu Dhabi and UAE banking sectors in recent years. In March 2020, with the pandemic sending shockwaves through the global financial system, the CBUAE launched the Targeted Economic Support Scheme (TESS) to ease operational and borrower cash flow challenges, while sustaining lending and mitigating liquidity pressures. At its peak, TESS supported some 15% of UAE banks’ total lending portfolios, with its loan deferral programme providing temporary repayment relief for over 300,000 retail clients, 10,000 SMEs and nearly 2000 private corporates.
Banks entered the pandemic in strong positions thanks to years of robust management, and they managed to maintain high CARs despite the 5% drop in GDP recorded for 2020. That year total sector assets expanded to Dh3.2trn ($871bn), while profitability fell but remained positive, with a return on assets (ROA) of 0.7%. The pandemic had a negative impact on asset quality, particularly among companies active in face-to-face sectors, such as hospitality, retail and tourism, while the drop in overall economic activity affected construction. Net non-performing loan (NPL) ratios were unusually high in 2020, rising to 5% and 2.2% in the corporate and retail sectors, respectively, and reaching as high as 9.2% in the construction sector.
However, the numbers significantly improved in 2021 despite the continuing impact of the pandemic. The country’s GDP increased by 3.9%, with the CBUAE scaling back TESS as business began to return to normal. The year was a story of two halves, with the first half of 2021 seeing sluggish lending and a continued deterioration in asset quality, while the second half saw lending growth rebound and NPL ratios improve, along with profitability. Total retail loans were up 5.2% that year thanks to the 8.8% growth in mortgage loans following the relaxation of TESS’s loan-to-value rules. That same year government-related corporate loans rose by 9.6%, although private corporate loans shrank by 1.9%. Corporates were active on the bond market, with low interest rates attracting them away from banks. In terms of NPLs, the year saw the net NPL ratio decline to 3.3%, while the same ratio for corporates improved by 0.4 percentage points to 4.7%.
The momentum that had begun building in the second half of 2021 continued into 2022. TESS was wound down, while GDP growth hit 7.4% for the year. Aggregate lending in the UAE banking system grew by 4.8%, with retail lending up a robust 7.7%, its highest rate of growth in six years. Mortgage growth was 10.4%, while personal loans rose by 5.7% and credit cards by 15.5%. Car loans experienced growth of 14.1%, while small business loans to individuals were up 4.8%. The wholesale credit segment saw overall growth of 3.1%, with the largest subsegment being lending to the private corporate sector, which was up 8.4% after falling in 2021. Lending to government-related corporates was up 4.4%.
Lending
SMEs faced a number of difficulties during this period. These entities are a key part of Abu Dhabi’s non-oil economy, as they accounted for as much as 63.5% of UAE’s non-oil GDP in mid-2022 and forecasts put the number of SMEs in the country at 1m by 2030. In 2020 loans to such businesses grew by 2.2% before dropping by 2.8% in 2021. This decline continued into 2022, with loans to SMEs shrinking by a further 2.5%. This was in part due to the fact that many SMEs were forced to scale back operations during the pandemic. At the same time, SMEs tended to be disproportionately affected by higher interest rates on bank loans due to the higher pricing of risk for companies that may not have the financial reserves or degree of bankable business plans that larger companies have. These are long-standing issues in SME financing, and the pandemic exacerbated these challenges.
Asset quality improved in 2022, while the overall net NPL ratio fell to 3%. In the retail loan segment, the net NPL figure dropped to 1.5%, while the figure was down to 4% for the corporate portfolio. Lower impairment charges and improved net interest income also helped drive up profitability, with overall net profit growing by 31.8% and ROA reaching 1.4%, while return on equity (ROE) stood at 10.5%.
Interest Rates
Higher interest rates were a major feature of 2022, as the global battle against inflation led to hikes in rates. The UAE was no exception, with the IMF estimating inflation to have averaged 4.8% in 2022, fuelled by price hikes in imported goods, real estate, food and fuel. The dirham is pegged to the US dollar, so it has followed the policy actions undertaken by the US Federal Reserve. In 2022 the CBUAE hiked rates by 425 basis points in total in response to hikes by the US Federal Reserve, with a further rise of 50 basis points seen in the first half of 2023. However, in September 2023 the US Federal Reserve kept rates steady. The CBUAE followed suit, and the CBUAE base rate applicable to the overnight deposit facility was fixed at 5.4% as of that month.
The initial results for June 2023 showed that total assets reached nearly Dh3.9trn ($1.1trn), up 12.3% compared to June 2022. Gross credit was up 4.2% year-on-year (y-o-y) for the same period, while total deposits for resident and non-resident customers with banks operating in the UAE stood at just short of Dh2.4bn ($650bn), up 13.9% y-o-y. The increase was due to a 17.8% hike in resident deposits, offsetting the 15% decline in non-resident deposits. UAE banks ended the first half of 2023 in a strong position, with CARs averaging 18.2%.
Growth is forecast for the remainder of 2023, with S&P Global reporting in September 2023 that continued growth in the UAE’s non-oil sector – projected at 6% – would offset the impact of higher interest rates. S&P therefore forecast 7% credit growth for the year overall, although the report did note that higher interest rates and a slowdown in the country’s oil economy could affect this projection.
Abu Dhabi Banks
First Abu Dhabi Bank, Abu Dhabi Commercial Bank and ADIB all weathered the pandemic well and saw healthy profit and credit growth continue into 2023. For the first half of the year, First Abu Dhabi Bank experienced a 65% increase in net profit to Dh8.1bn ($2.2bn) compared to the corresponding period in 2022, while operating income surged 44% to Dh13.6bn ($3.7bn). The bank’s total assets exceeded Dh1.1trn ($299bn), while the return on tangible equity grew from 12.3% in the first half of 2022 to 18.6% in the first half of 2023. Although high interest rates supported profitability, the bank reported a significant hike in non-interest income, which accounted for 34% of the bank group’s income in the first half of 2023.
Abu Dhabi Commercial Bank announced that net profit for the first half of 2023 was up 25% to Dh3.8bn ($1bn) compared to the corresponding period in 2022, with the bank’s operating income up to nearly Dh8bn ($2.2bn) compared to Dh6.4bn ($1.7bn) in the first half of the previous year. Non-interest income also saw a healthy 28% growth and total assets were up 9% to Dh521bn ($142bn), with total customer deposits up 8% to Dh316bn ($86bn). The bank also reported that its NPL ratio – 5.1% – was at its lowest level since December 2020.
As for ADIB, net profit for the first half of 2023 was Dh2.3bn ($630m), up 61% compared to the first half of 2022. Total assets rose by 28% to Dh182bn ($49.5bn), while revenue increased by 50% to Dh4.3bn ($1.2bn). ROE grew to 25%, and deposits grew by 31% to Dh150bn ($40.8bn), as the bank noted that it had attracted 96,000 new customers.
Abu Dhabi’s top banks entered the second half of 2023 in strong positions, as they benefitted from having more than the required levels of liquidity, in addition to strong profitability, and continued credit and asset growth. The first six months of the year were positive for the UAE’s banking sector, with the country’s top-four banks by asset size – First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Emirates NBD and Dubai Islamic Bank – recording total net profit of $7.4bn for the first half of 2023, up 71% when compared with the first half of 2022.
Global uncertainty, combined with the UAE’s neutral position on the Russia-Ukraine conflict, made the country attractive to high-net-worth customers in 2022 and 2023, while sectors such as real estate and tourism also drew in foreign investors. These trends seem set to remain through the end of 2023.
Fintech Futures
Banking is a major focus of the UAE’s fintech industry. The regulatory framework enables fintech outfits to develop, as do the large selection of free zones available for new start-ups. ADGM can lay claim to a number of fintech firsts. The free zone pioneered the first fintech regulatory regime in the MENA region, and its RegLab is the world’s second-most active fintech sandbox. In November 2022 ADGM launched the Middle East, Africa and Asia Crypto and Blockchain Association (MEAACBA), which works in partnership with major global cryptocurrency exchanges, such as Mubadala’s MidChains, Dubai’s BitOasis, Binance, Crypto.com and Bahrain’s Rain. The MEAACBA addresses the sector’s challenges, while promoting the integration of cryptocurrency into the global economy.
In February 2023 the CBUAE announced its Financial Infrastructure Transformation (FIT) programme. The plan consists of nine initiatives, including plans for a new central bank digital currency (CBDC), the Digital Dirham, for both cross-border and domestic payments. In April 2023 the CBUAE announced it would be implementing its CBDC strategy in collaboration with Abu Dhabi-based digital services providers G42 Cloud, R3 and Clifford Chance. FIT also includes the CBUAE’s adoption of supervisory technologies, along with electronic know-your-customer and the development of a fintech innovation hub.
FIT makes the UAE one of the few MENA markets to roll out an instant payment platform. The system is expected to be mandatory for banks in the UAE, where cashless and real-time transactions have been surging. In 2021 around 28m such actions were made, and they are expected to reach 134m by 2026. Payment industry revenue in the UAE is also expected to grow to $18.7bn by 2031, according to an October 2022 Boston Consulting Group report.
Payment Processing
Many Abu Dhabi-based start-ups are pursuing payments as an area of development. Some of these companies include Pyypl, which offers blockchain-based card-linked wallets for customers; and NymCard, which enables payments processing for businesses. Other fintech start-ups of note include Lnddo, which provides a platform for merchant cash advance loans; and TCP, an online lending platform for invoice financing.
FIT supports the CBUAE’s efforts to strengthen its supervisory and cybersecurity functions. In January 2023 the CBUAE issued new guidelines for all licensed financial institutions operating in the country, with a focus on digital identification systems to address due diligence obligations. The guidelines were seen as an important next step in fighting money-laundering and terrorism financing. Addressing these issues has long been a key role of the CBUAE, with the January 2023 guidance building on Federal Law No. 20 of 2018 and a supplementary guidance issued in August 2022 for financial institutions operating in the payments segment.
Abu Dhabi’s banks have been at the forefront of the move towards digitalisation. First Abu Dhabi Bank, for example, has been working with Cisco AppDynamics, ThousandEyes and Perform IT to improve customer service across its digital supply chain, reducing downtime for client-facing applications by some 70%. In June 2023 the bank and IBM Consulting announced that they would be collaborating to migrate more of the financial entity’s applications to a cloud environment. As of August 2023 ADIB had moved a majority of its workload and applications to Microsoft’s Azure cloud system as part of the bank’s digital transformation efforts.
Outlook
With the economy continuing to expand on the back of high oil prices and a robust non-oil sector, Abu Dhabi’s banks are expecting to see further growth. Interest rates could stay relatively high for some time despite efforts to tackle inflation, although the emirate’s lenders are well provisioned to remain profitable. Credit growth is set to continue, albeit more slowly than in 2022 and 2023. The UAE could also continue to benefit from capital flight from other countries. The Russia-Ukraine conflict, for example, has led to many high-net-worth individuals relocating to the UAE.
Meanwhile, digitalisation – and therefore boosted efficiency and reduced operating costs – is set to continue, while banking customers in the UAE are likely to benefit from better services and competitive costs. The CBUAE and the FSRA’s commitment to strengthening and improving the regulatory and supervisory environment could boost the UAE’s global standing, as well as its domestic practices.
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