The UAE banking sector witnessed solid performance in 2007, as combined profits rose 25 per cent to Dh24.8 billion compared from Dh19.4bn in 2006. Deposits grew by 21.5 per cent to Dh675bn from Dh555bn, while asset and liabilities jumped 23 per cent to Dh1.55 trillion from Dh852bn.
"The future is bright for banks operating in the UAE. The economy is expected to grow as demand for oil and gas will continue to be strong for coming years, creating additional opportunities for banks," Central Bank Governor Sultan Nasser Al Suwaidi said.
Aggregated banking system net profits have more than trebled between 2003 and 2006, increasing from Dh6.4bn in 2003 to Dh19.7bn in 2006. Profitability of the sector has been growing significantly. Banks have been benefiting enormously from the economic boom in the UAE and the region, due principally to substantial oil revenues.
However, oil represents a smaller proportion of the economy than in some other Gulf Co-operating Council states. Despite the favourable economic environment, the banking sector's net income growth slowed in 2006 due to the significant stock market correction. Banks, however, have sufficient core business in order to overcome this setback with net interest income and core banking fee growth remaining strong.
The UAE is experiencing rapid lending growth. Lending, however, is concentrated on industrial and trading enterprises. Due to strong competition, the margins on corporate lending are likely to decrease.
Banks have been further diversifying their loan portfolios by focusing on domestic retail business. Retail lending is already expanding rapidly and will continue to do so as mortgages gain in popularity.
The asset quality of the banks has improved significantly over the past few years. The average non-performing loan ratio of rated banks decreased from 8.3 per cent in 2002 to 1.7 per cent in 2006, while their provisioning cover rose from 80 per cent to 106 per cent over the same period, according to a report by Moody's Rating Service.
New entrants
As Noor Islamic Bank is set to launch operations early this year, plans to set up two new Islamic banks were announced. The Abu Dhabi Government said in March it is in the process of setting up of Al Hilal Bank, an Islamic bank, with a paid up capital of Dh4bn, to provide a whole range of banking services.
The bank will cater to project finance requirements. Abu Dhabi Investment Council will be the sole owner of Al Hilal and Eisa Mohammed Al Suwaidi will be chairman of the board. It will also have all the instruments of retail and corporate banking, render consultancy services, funds management, and portfolio finance and invest customers' funds in Shariah-compatible financial instruments.
Ajman is set to launch a new Islamic bank with a paid-up capital of Dh500m, media reports said. Initially, the Islamic banking needs were met by Dubai Islamic Bank and Abu Dhabi Islamic Bank until 2001. The same year saw National Bank of Sharjah announcing plans to convert itself into an Islamic bank called Sharjah Islamic Bank. This was the first conversion of a conventional bank into a Shariah-compliant institution.
Later Emirates Bank Group decided to convert its subsidiary conventional bank Middle East Bank into an Islamic bank. Thus MEB became Emirates Islamic Bank and started operations in 2004.
Only after Dubai Holding acquired 70 per cent ownership of Dubai Bank from Emaar Properties, it decided to convert the bank into an Islamic bank in 2005.
The UAE Central Bank granted operating licences to three Gulf banks in 2007 - Saudi American Bank, Doha Bank and National Bank of Kuwait. Al Suwaidi said the Central Bank is reviewing policy on foreign banks and will announce a number of major changes in the coming months.
"We are reviewing this issue regularly and you will be surprised to see a change in the policy in coming months," the Governor said. The surprise could well be in terms of allowing foreign banks to expand their branch network from the limited eight to a higher number, reduce or eliminate taxation, restructure the classification of banks and change rules related to foreign investment and takeover of local banks.
Currently, foreign and national banks are not subject to the same policies regarding taxation. National banks are exempt from tax on operations within the UAE, while foreign banks are subject to a 20 per cent tax.
Mega merger
Emirates Bank International (EBI) and National Bank of Dubai (NBD) completed their proposed merger in October, creating a national champion and the biggest lender with total assets of Dh228bn in the Gulf Co-operation Council. Emirates NBD, the merged entity, announced a nine-month net profit of Dh2.56bn last month. It will have a combined market share of almost a fifth of corporate loans in the country, with 99 branches and 429 ATMs.
After the merger, EBI shareholders own 66.3 per cent, while NBD shareholders have 33.7 per cent of the share capital in Emirates NBD, respectively. "This merger offers a unique opportunity for our organisations to create a regional banking powerhouse on a scale that will support our shared vision for international expansion," said Ahmed Humaid Al Tayer, Chairman of EBI.
"By combining two of the UAE's strongest banks we are building a leading banking institution for the UAE and the wider region. We look forward to offering our clients, shareholders and customers greater value and benefits," Abdullah Mohamed Saleh, Chairman of NBD, added.
Emirates NBD is expected to have over 6,000 employees and will have presence through branches in the UAE, Saudi Arabia, Qatar, the United Kingdom and Jersey (Channel Islands), and representative offices in India, Iran and Singapore.
Consolidation
Consolidation and mergers were the theme in the region's banking sector after the merger of Emirates Bank and NBD. Last week, Commercial Bank of Qatar (CBQ) raised its stake in Sharjah-based United Arab Bank (UAB) to 34.7 per cent giving it enhanced exposure to the second-largest Arab economy and greater control on the management board of UAB. Qatar National Bank (QNB) in July acquired a 20.6 per cent stake in Jordan's Housing Bank for Trade and Finance for $442m (Dh1.6bn). QNB has also established joint ventures in Syria and opened offices in Libya, Kuwait, and Singapore.
Commercial Bank of Kuwait (CBK) said that it is considering three takeovers this year as it plans to expand in the region. CBK, the country's fourth-largest lender plans to expand in the Middle East and North Africa and is looking at Syria and Saudi Arabia.
Analysts have said consolidation, mergers and acquisitions have become increasingly important in the face of falling barriers to international competition driven by free-trade agreements and cross-border licensing agreements. While the Emirates NBD merger was by far the most important in the Middle East, it was not the only one.
EIIC acquired a controlling stake in Abu Dhabi Islamic Bank via a convertible bond. Later, ADIB also bought a controlling stake in Egypt's National Bank for Development, which had a large portfolio of non-performing loans. Dubai Financial Group bought a significant stake in the Greek Marfin Financial Group, which has several banking assets around the world. Marfin has bought controlling stakes in three banks in the second half of 2007.
Moody's in its annual banking review said that overseas expansion offered opportunities for both geographic and revenue diversification as competition in the local market intensified. "Further consolidation may lead to stronger and more diversified financial institutions," the rating agency said.
CD auction
The UAE Central Bank announced in November that it will implement an auction-based system of selling Certificates of Deposit (CDs), which will be issued in euros and dollars. The new issuance system will enable banks to subscribe to the CDs at their preferred interest rate, amount and tenor. The maturity of the CDs will range from one week to five years, the Central Bank said.
The system "will also enable interested banks to buy Central Bank CDs denominated in US dollars and euros". Under the system, banks can also carry out CD repo agreements with the Central Bank for a period not exceeding three months or the maturity date of the CD, whichever comes first. (With inputs from Nitin Nambiar)
By Parag Deulgaonkar
Emirates Business 24/7 2008
