When the UAE’s largest bank won the race to report first half results on 11 July, it announced a record net profit of more than Dh500m ($136m). Bankers in the Emirates said they would be very surprised if most of the UAE’s other banks did not follow suit.
National Bank of Abu Dhabi’s (NBAD) Dh503 million first half net profit represented a 28% increase over the same period in 2003 – itself a spectacular year across the Emirates’ banking sector. With oil prices spiralling upwards, all bar one of the federation’s major banks reported burgeoning earnings, assets and profits for the third successive year.
Senior UAE bankers are a modest crowd, and do not claim all the credit for the sector’s recent spectacular results, skyrocketing share prices and ratings upgrades. Abdul Aziz al-Ghurair, Mashreqbank’s CEO, calls regional specialist Capital Intelligence’s hike in his bank’s long-term foreign currency rating to A- from BBB+ “gratifying recognition not only for us but for the UAE as a whole, as it recognises the stability of the economy that has contributed well to our achievements”.
“Banks are doing well because of favourable general macro trading conditions, high oil prices and an economy growing by around 7% a year, bad debts and business failures are lower and people are earning money – therefore there is liquidity in the market and there are good bank results,” says one bank CEO.
Banks are doing well because the region is doing well, but underlying factors in the Emirates’ banking sector strength are home-grown and put banks – even those that plan to stay outside Dubai’s latest tilt at globalisation, the Dubai International Financial Centre (DIFC) – in a position where they can look at new and wider markets.
Policy support
Analysts say that good government has benefited UAE banks directly and indirectly by making the Emirates an attractive place to do business, especially for companies looking for a regional hub in the Gulf and wider Middle East, across the Indian Ocean to the Asian subcontinent and increasingly northwards into Uzbekistan, Kazakhstan and their neighbours. Ambitious sectoral development programmes are driving banking sector growth, most visibly in commercial powerhouse Dubai’s burgeoning tourism, trading, media and communications, trading and re-export sectors.
Abu Dhabi, by far the wealthiest emirate despite Dubai’s high profile, has ambitious plans – notably to develop a classical industrial sector. The Abu Dhabi government, working through one of its investment vehicles, the Mubadala, seems set to acquire around a 10% stake in Germany’s Volkswagen, and is examining the feasibility of establishing automotive industries in the emirate.
Dubai’s foray into the real estate market, where for the past two years foreigners have been allowed to purchase freehold property in selected locations, is becoming the driving force in the economy that the other emirates (and other countries, such as Bahrain and Qatar) are watching closely. The property boom is locking expatriates into the Emirates’ economic fabric, while providing new product lines for banks such as mortgages.
Retail dividends
Retail banking is doing particularly well, with lending rates at around 10% and borrowing at about 2%. Some margins are even better, with lending as high as 17%-18%, although in others, where there is more competition, rates are as low as 6%-7%.
At this stage in the interest rate cycle, when retail banking is better business than corporate banking, some of the more consumer-oriented banks are doing better than their counterparts, although this situation is likely to reverse as interest rates creep upwards. This could impact on banks such as National Bank of Ras Al-Khaimah (RAK Bank), where consumer banking contributed 87% of its 2003 gross income. RAK Bank has embarked on a drive to capture a market in the small and medium-sized enterprise (SME) segment.
Family firms
One of the more exotic aspects of UAE banking is the involvement of ruling families. “Ruling families are big in all banks. Only Mashreqbank is absolutely private – you can’t make a distinction between ruling families, government and business,” says one bank executive. But he insisted the UAE’s top families exerted relatively little influence on banks, leaving them professionally managed with large degrees of autonomy.
While the seven emirates’ ruling families have at some stage enjoyed the kudos of a bank bearing the name of their emirate, considering a bank an emblem of national pride, it would be wrong to argue that this is why the UAE is over-banked.
“The UAE is over-banked because profits are good, thus there is little motivation for consolidation,” says one Dubai-based analyst. Bankers and analysts argue that Emirates banks should seriously contemplate merging sooner rather than later if they intend competing with foreign players.
No local bank has the capacity to compete with the likes of an HSBC or a JP Morgan. One local bank head observes that HSBC has a balance sheet about 70 times larger than the UAE’s largest bank, while JP Morgan has about eight times the combined assets of the federation’s banking sector. Global competitors have scale economies that the Emirates’ banks simply cannot match.
Foreign banks are eating into the UAE market, with around a 25% and increasing share of the banking sector. Local bankers would like to see the number of major banks whittled down, perhaps from 21 to 10, and they are concerned that the motivation to consolidate the sector will come at a time when profits are not so good as they are now. They fear mergers may be negotiated from a position of weakness.
Another perceived drawback comes with constraints on banks’ ability to raise capital. Shares must be issued at a price fixed by a formula that takes into account the current share price, the share’s original value and its current net asset value. This means banks cannot raise capital by issuing shares at a price the market will bear.
Investor excitement
Investment bankers face other problems. “My number one problem as an investment banker is not having enough products,” says Karim El Solh, CEO of the Abu Dhabi-based investment house, The National Investor (NI). “Daily cash turnover of Dubai Carrefour supermarket exceeds the trading value of the Dubai Financial Market,” he observes, arguing that the UAE’s lack of liquidity – and that of the wider region – is not due to lack of demand.
“NI launched a Dh200m IPO for the Finance House, and raised a total of Dh8.6bn, which meant it was 75 times oversubscribed,” he says, referring to the February 2004 IPO that launched the company to accept deposits and offer loans with a focus on Islamic banking products and services.
“There’s a flood of liquidity in the region,” says Mr El Solh, with “a big chunk of cash” retained in the region since 9/11, before which huge amounts of investments flowed out of the Gulf. “Local capital markets are in overdrive unlike other markets in the world,” he adds, with a fundamental shift in local investment perspectives. Mr El Solh typifies the prevailing sentiment among Gulf investors as: “Wait a second, it’s not bad investing here.”
NI announced a 212% increase in profits for the year ending March 2004, the result of its core investment banking, private equity and asset management activities. Revenues from investment banking activities soared by 117%, while on the Abu Dhabi Securities Market, NI shares appreciated by 51.5%, outperforming the benchmark NBAD General Index, which went up by 39.5% over the same period.
NI has proved capable of engineering some innovative investment banking transactions, including the issuance of the world’s first Islamic corporate Sukuk bond for Tabreed, a UAE-based company supplying large or multi-building cooling systems. This was also the first GCC region bond to be listed in Luxembourg.
Mr El Solh realistically admits that the region’s capital markets are still evolving. “We’re not there yet – one problem is that with local IPOs, we can’t do book building.” He concedes that investors and finance houses would have benefited from the higher share price that would probably have resulted from a book building exercise. But he sees much more upside than downside in the future of Emirates investment banking. “From our perspective, we’re going regional – we’ve increased the company’s capital from Dh77m to Dh200m and we’re looking at regional opportunities.”
