Fast growth, cultural specialization, and segmentation are all to be found in the banking sector of the United Arab Emirates, whose results in 2006 reverberated with the dual themes of core banking growth and volatile stock markets.
Although the banking sector is large in proportion to the resident population, its 46 banks (plus 2 specialized banks and some 50 foreign rep offices) are fragmented by both territorial and topical categories. The territorial divisions are result of the fact that the seven emirates have local banks, often with ties to the respective governments or ruling families.
In topical differentiation, the sector’s strongest group by market share are listed commercial banks, followed by foreign banks, and then by Islamic and unlisted banks. Local commercial banks account for the lion’s share of retail branches, while foreign banks are restricted to eight branches each. In sheer operator numbers, however, the 25 registered foreign banks in the realm outnumber the 21 UAE-headquartered banks. By 2005 numbers, the asset distribution between Emirati and foreign banks was about four to one of total sector assets ($174 billion).
As the listed banks have reported their 2006 preliminary results, the National Bank of Abu Dhabi (NBAD) took the crown of exceeding AED 100 billion ($27.2 billion) in assets with 19% growth reported for last year. Customer deposits increased at equal rate to reach AED 71 billion. NBAD, the largest bank in the UAE, reported its net profits as 18.4% lower, at AED 2.1 billion, compared with 2005 profits.
Profits contraction
The bank attributed the profits contraction to lower investment income and shrunken fee income from brokerage and asset management activities—earnings contraction themes that also drove profit developments at Mashreqbank, Union National Bank (UNB) and Commercial Bank International (CBI) into negative numbers for the year.
In 2005, the management of initial public offerings and the provision of equity market services along with gains from own GCC stock and investment portfolios were the big income boosters for UAE banks—which made it predictable latest by middle of last year that the correction year of 2006 would not offer the same profits harvest.
CBI reported the most extreme shrinkage, with a drop in net income from AED 239.7 million in 2005 to a paltry AED 8.7 million in 2006, because of revaluation of its investments portfolio. CBI, which is one of the smaller local players, on the other hand reported 41% growth in assets to AED 7.38 billion in 2006.
Different to NBAD, other top banks kept the contraction dogs at bay at least to the point of maintaining profit increases. Top Dubai player Emirates Bank International (EBI) succeeded in 9% net profits growth to AED 1.9 billion on total revenues of AED 2.9 billion, the latter being a 29% improvement from 2005. However, also for EBI the growth in total assets and deposits outstripped profits growth. The bank reported assets of AED 95.6 billion and deposits of AED 40.9 billion—up by 69 and 39%, respectively.
The runners up in Abu Dhabi and Dubai presented divergent result figures. Abu Dhabi Commercial Bank (ADCB) entered 2007 with assets of AED 81.1 billion, a gain of 41% when compared with 2005. ADCB upped its profits by 12% to AED 2.1 billion. Mashreqbank, headquartered in Dubai, reported its assets at year-end 2006 as AED 56.7 billion and customer deposits as AED 33.9 billion, 13% higher than in the previous year. The bank said its contraction in net profits, which were down 10% on the year at AED 1.6 billion, stemmed from the lower investment income of its subsidiary Oman Insurance.
Next in the sector are National Bank of Dubai (NBD) and the Abu Dhabi-based First Gulf Bank (FGB) and Union National Bank (UNB). NBD edged up 1% in net profits to AED 1.11 billion, improving its net interest income, however, by 17% to AED 1.2 billion. The bank’s assets grew 35%, to AED 51.4 billion and with AED 45.4 billion at the end of 2006, its customer deposits were 22% higher than a year earlier.
Achieving 45% improved net profits of AED 1.5 billion, First Gulf Bank stood out with reporting the highest growth in net profits among the larger conventional UAE banks for 2006. The bank, which has ambitious plans to expand its retail network beyond the 15 branches currently shown on its website, increased its assets last year by 82% to AED 47.7 billion and doubled its deposits to AED 34.4 billion. Net interest income and other income improved at rates of 37 and 56%, respectively, and other income represented 41% of total income.
Union National Bank improved its net interest income by 29% to AED 889 million but could only partially offset a 35.3% drop it incurred in investment income, resulting in a 12% contraction of UNB’s net profits to AED 1 billion. The bank, the only one in the UAE in which both the emirate of Abu Dhabi (40%) and the emirate of Dubai (10%) are direct shareholders, achieved 19% asset growth to AED 41.6 billion and a 17% increase in customer deposits to AED 30 billion.
FGB and UNB are favorites of regional stock market analysts. Investment houses Shuaa Capital, Global Investment House, and Prime Securities recently recommended UNB as buy or strong buy while Shuaa, Global, and EFG Hermes gave their nods to FGB.
Other stock picks of regional investment advisors in the UAE banking sector are fairly diverse, based on price to earnings ratios. Global Investment House, which issued an extensive report on UAE banks in January, liked—besides UNB and FGB—NBAD and NBD. Global also recommended buys on two Islamic banks, Abu Dhabi Islamic Bank and Sharjah Islamic Bank.
Shuaa Capital reviewed only Abu Dhabi based banks in August of 2006 and recommended NBAD, ADCB, and UNB. From EFG Hermes, recommendations came in December for NBD and Commercial Bank of Dubai (CBD). CBD is one of the sector’s smaller banks, with net profit of AED 601 million (up 9%) in 2006 on assets that grew 22% to AED 18.7 billion.
Islamic banking growing the most
While conventional banks are far ahead overall, the UAE banking sector segment with the highest growth figures in 2006 was Islamic banking. Although the first fascination with Islamic banking seems to have diminished a bit last year in some Gulf countries, the UAE Islamic banks have made strides on their way of catching up with the GCC’s center for the specialty, Bahrain. Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank (DIB) both increased their stature greatly, amassing net profit growth of 66% and 47%.
Between the two, DIB showed the higher absolute figures with assets of AED 64.5 billion (up 50%), customer deposits of AED 47.7 billion (up 43.5%), and net profits of AED 1.56 billion.
The bank, which is the oldest shariah-compliant bank in the GCC, is still on a pronounced expansion course and in 2007 wants to add another dozen branches to its network, which it has multiplied in the past five years to 40 branches. ADIB, on its part, had the stronger relative asset growth as well as the stronger profits growth last year, reaching AED 36 billion in assets (up 63%) and net profits of AED 571 million. ADIB’s customer deposit base rose 33% to AED 24 billion.
Another bank to look out for in the Islamic field is Dubai Bank, a daughter of big real estate player Emaar Properties and government-owned Dubai Investment Group. Having received approval for tripling its capital to AED 1.5 billion, Dubai Bank aims to grow aggressively at home and abroad.
Such jumps in capitalization and deposits are hard to envision without the factor that has driven everything up in the GCC over the past two year—hydrocarbon revenues. Banks have been a natural beneficiary of the overspill in oil money and its accompanying economic effects, such as epidemic consumer demand growth, the construction boom, and stock markets craze.
While the story of UAE banking is numbers-driven, a side issue of some interest could be the evolution of corporate identities and marketing profiles. The sector, embedded in a GCC frame of corporate name selection where similarities create no apparent concerns, is (at least in English) a bland alphabet soup of location-laden and easy-to-confuse abbreviations.
Regional expansion is another theme with some enticing questions. Based on their growing strength and the UAE’s far-flung trade ties, Emirati banks have been charting cross-border growth potentials in the MENA region but also in Sudan, Pakistan, India and even China.
It will be worth watching how UAE banks will sharpen the profiles and names they communicate and how they will navigate the challenges of expanding their corporate cultures into new markets and overcoming human capital restraints that are reflected already in the sector’s great need for skilled bankers and experts in Islamic finance, where almost every sizeable UAE bank is building its presence.
Looking forward, UAE banks are forecasting strong earnings forecasts based on the country’s rosy economic outlook. Analysts see core banking activities offering much space for development, from deposits and retail and mortgage lending to financing of the services sector, industrial projects and public sector spending. Funding gaps are being addressed through medium term note programs and the low risks attached to the UAE economy and its banking sector mean that the sector’s prospects are sound.
At the top of the sector, where the three largest banks in the UAE control about half of the market segment covered by the top 10 banks, analysts do not expect tremendous changes. Foreign banks face hurdles through taxation and limits on their branch networks. In the market at large, retail network growth targets of domestic and Islamic banks are massive throughout.
But although the UAE is well-reputed as the competitive center of the GCC, competition in the banking sector may yet have to approach another dimension. Banks have intermingled ownership structures where governments, government-owned institutions, and state-dominant families play such a large role that the sector by default gives out an oligopolistic scent. With new trade agreements and changing market conditions, UAE banks will be tasked to transcend existing barriers.
