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Middle EastAugust 31 2008

Tapping into fresh overseas deposits

The UAE’s banks’ profits based on lending are huge but with customer deposit levels lagging and international borrowing increasingly difficult, many are looking towards expansion opportunities abroad. Writer Mark Ford.
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The UAE’s banks continue to report bumper profits – this time for the second quarter or first half of 2008 – but they appear to be lending much more to customers than they are taking customers’ deposits. The country’s second-largest bank, National Bank of Abu Dhabi (NBAD), reported net H1 2008 profits up 58% over the same period in 2007. Dubai Islamic Bank reported a 59.7% rise in Q2 2008 net profit on the back of lending demand. Fast-growing First Gulf Bank (FGB) said its Q2 2008 net profits were 70% up on the same quarter of last year.

But there are worrying signals from the UAE’s banks, where the differential between loans and customer deposits seems to be widening. At end-2007, NBAD’s loans/ deposits differential was about Dh2bn ($544m); by June it had widened to Dh17.2bn. NBAD puts the increase in loans down to the demand in Abu Dhabi to finance the emirate’s substantial growth. “NBAD is well positioned to play its part in the ongoing Abu Dhabi and UAE growth story,” says Michael Tomalin, the bank’s chief executive.

But the differential appears to be widening faster. NBAD reported a 63% increase in lending in Q2 2008, compared with the 33% increase in the six months to June 2008. Other banks reporting bigger increases in loans than customers’ deposits include Abu Dhabi Commercial Bank (ADCB), while FGB reported a 47.97% increase in loans offset by a relatively modest 17% increase in customer deposits.

An exception to the trend is Emirates NBD – the Middle East’s largest bank by assets, formed in October 2007 when Emirates Bank and National Bank of Dubai merged. It reports similar increases in loans and customer deposits while its Islamic customers increased by a healthy Dh14.5bn at end-2007 to Dh22.2bn by June.

Money moves abroad

The UAE is not as awash with liquidity as it has been. Oil revenue is being invested overseas and speculators are withdrawing millions of dirhams that they bought and deposited in UAE banks when it looked as if the country would abandon the dirham’s peg to the dollar. Their idea was that de-pegging the currency from the dollar would push up the dirham’s value and they would net bumper profits.

Banks, meanwhile, are finding it tougher to borrow money. The one-month Emirates Interbank Offering Rate – the interest rate charged by local banks for interbank transactions – increased by 28.7% between June 1, when it stood at 2.02%, and August 1, when it reached 2.6%.

Banks are looking for overseas expansion opportunities. Abu Dhabi Financial Services Company (ADFS), NBAD Group’s financial brokerage, has agreed in principle to acquire a controlling stake in Egypt’s Al-Salam Brokerage Company. This is “in line with [NBAD’s] strategic expansion plans regionally and internationally”, says Khaled Abdel Rahman Khaled, ADFS’s general manager.

“We are looking to gain presence in major financial centres,” says André Sayegh, FGB’s chief executive. Last year FGB opened its first international office, in Singapore. It has now obtained approval to open a representative office in Mumbai and plans to open offices in the UK, China and Qatar. “We are also progressing with our initiatives to have a physical presence in Libya and Algeria,” says Mr Sayegh.

In September 2007, FGB – in which senior members of Abu Dhabi’s ruling family have big stakes – signed a memorandum of understanding with Libya’s Economic and Social Development Fund (EDSF) to establish a fully fledged commercial bank in Tripoli. The new Gulf-Libyan Bank will be owned equally by the two organisations, but fully managed by FGB. Analysts believe its creation may be a product of the reportedly warm friendship between Abu Dhabi Crown Prince and FGB chairman Sheikh Mohammed bin Zayed al-Nahyan and Saif al-Islam, the eldest son of Libyan leader Muammar al-Qaddafi and the guiding influence behind the ESDF’s establishment.

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Read more about:  Middle East , United Arab Emirates