Global Investment House –Kuwait – UAE Economic and Strategic Outlook – Banking Sector – Banking sector continues to grow in the UAE as a result of relatively low interest rate environment, high oil prices and a flourishing economy. The UAE has a remarkably high number of banks to serve a population of around 4.5mn and an economy with an annual GDP of about US$190bn. As of Sep-2007, UAE had 22 local banks, 27 foreign banks, two specialized banks and around 65 representative offices of other foreign banks.
The total assets of banks operating in the country have grown by 43.4% to reach AED1,232.5bn at the end of 2007, against AED859.6bn at the end of 2006 making it the largest among the GCC countries. This has come on the back of a strong y-o-y growth of 34.7% reported at the end of 2006. The total banking assets have grown at a CAGR of 35.4% in the past four years from 2003-2007.
Cash and deposits with the Central Bank increased by 104.3% in the first nine months compared with the year end 2006 figures and reached AED129.5bn at the end of Sep-2007. However, foreign assets of the banking sector witnessed a decline of 1.2% in the first nine months of 2007 after having increased by 32.5% to AED231.94bn in 2006. Foreign liabilities increased further by 37.8% during the first nine month period and reached 244.9bn. This has come on the back of a massive increase of 108.5% recorded in 2006. As a result the UAE banking sector has become a net borrower with net foreign liabilities of banks standing at AED15.6bn as compared to net foreign assets of AED54.3bn at the end of 2006 and signifies the increased borrowing by UAE banks from the external market.
Banks increasingly relied on foreign borrowing, at longer maturities and lower rates than available in the domestic market, to fund the strong growth of credit. Although potentially increasing their exposure to exchange rate risk, these foreign borrowings have allowed banks to better match the duration of their liabilities and assets, thereby reducing their sensitivity to interest rate risk.
Asset composition of UAE banking sector is characterized by a high proportion of claims on the private sector and an exceptionally high proportion of foreign assets. Foreign assets, which formed 27.0% of the total assets at the end of 2006, pertain to the investments made abroad by the government and funded by the banks in UAE. Most of this exposure is in the form of bank placements, and a significant portion of it is to top-rated banks in Western OECD countries. However, it can be seen that the proportion of foreign assets has come down during the last few years, from 32.7% in 2001 to 27.0%% in 2006 and further down to 21.5% by the end of Sep-2007.
The surge in banking sector assets in the UAE has enabled rapid credit expansion to households, corporations, and public and quasi-public enterprises. A lot of construction activity is on in Abu Dhabi and Dubai with mega projects for hotels, apartments, commercial and entertainment properties and infrastructure currently going on. Also the influx of population due to the booming economy and negative real interest rate environment is driving the credit expansion.
Over the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 2001, growth of total credit accelerated in the following two years. Cashing in on the favorable macro-scenario, total credit increased by 36.1% to AED537.4bn in 2006, with the credit to residents growing at a slightly lower rate by 34.3% to AED474.2bn. The total credit and credit to residents grew further by 20.1% and 22.1% respectively in the first nine months of 2007.
Likewise, credit extended to non-residents has grown by 51.5% to reach AED63.26bn at the end of 2006. Distribution of credit to residents according to type of facility shows that the increase in credit mainly occurred in loans, advances and overdrafts which increased by 32.6%. The bulk of this increase went to the industrial and trading enterprises which increased by 34.2% and formed 56.3% of total loans, advances and overdrafts.
The growth in credit to residents is attributed to the growth in lending to private sector. As private sector lending contributes 79.8% of the loans and advances to residents. Although the contribution has declined from 88.1% in 2001 to 79.8% in 2006, it still plays an important role in driving the credit growth especially in favorable macro-economic conditions. During the first nine months of 2007, the private sector credit increased by 20.7% to AED417.6bn as compared to AED345.8bn at the end of 2006, bringing the contribution up to 80.8% in terms of credit to residents.
Mortgaged real estate loans increased substantially at 80.1% in 2006 and further increased to 61.5% in the first nine months of 2007. However the credit extended to the non-resident sector was moderate with a growth of 5.3% in the first nine months as compared to a growth of 51.5% achieved at the end of 2006.
Most economic sectors witnessed an increase in the amounts of bank credit received with the exception of Agriculture and Mining and Quarrying sector that saw a fall at the end of Sep-2007 after having grown substantially at the end of 2006. Credit extended to the financial sector saw the highest surge, growing by 62.8% in the first nine months, reaching AED30.3bn at the end of Sep-2007. This was followed by personal loans for consumption, manufacturing, personal loans to small to medium enterprise (SMEs), electricity, gas and water and the construction sector growing by 31.5%, 30.7, 19.8%, 18.1% and 17.6% respectively in the first nine months of 2007. Credit to government, too has grown by 16.7% in the first nine months. The growth in this segment reflects the increasing reliance of the government agencies on bank financing, especially for the mega projects that are currently going on in the country.
Biggest banking merger…
Emirates Bank International (EBI) and National Bank of Dubai (NBD) completed their proposed merger in October, 2007. The new bank which is known as Emirates NBD had a total asset base of AED253.8bn at the end of 2007 which is a little over 20% of the total assets of the sector and reported a profit of AED2.8bn for the year 2007. Emirates NBD is now the dominant retail player in UAE with 114 branches and the largest banking entity in the MENA region surpassing the Saudi-based National Commercial Bank in total assets.
Ongoing consolidation in the banking sector…
A lot of consolidation is currently happening in the banking sector. Beside the Emirates NBD merger during 2007, Commercial Bank of Qatar (CBQ) raised its stake in Sharjah-based United Arab Bank (UAB) to 34.7%. Also, Emirates International Investment Company (EIIC) acquired a controlling stake in Abu Dhabi Islamic Bank (ADIB) via a convertible bond. Later, ADIB also bought a controlling stake in Egypt's National Bank for Development. Dubai Financial Group bought a significant stake in the Greek Marfin Financial Group, which has several banking assets around the world. Overseas expansion offered opportunities for both geographic and revenue diversification as competition in the local market intensified.
Performance of UAE Banks in 2007…
Banks in the UAE have benefited from the rapid economic expansion currently happening in the UAE. The total bank assets and profits increased by 43.4% and 23.2% respectively in 2007. The return on equity (ROE) at 21% for the year 2007 too has improved over 18.2% reported in the previous year. The return on assets (ROA) has come down marginally to 2.0% at the end of 2007 from 2.2% recorded in the previous year. The banking sector’s balance sheet continues to remain strong with the regulatory capital-assets ratio (CAR) at 14.23% at the end of Sep-2007
There are also concerns that the UAE banks may be heavily exposed to a long-anticipated downturn in the real-estate sector. Although mortgages still account for a relatively small part of bank loan portfolios (7.8% at the end of Sep-2007), the indirect exposure (Personal loans for business and consumption purposes comprising 22.7% of the total credit) could be significant.
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