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| National Bank of Dubai’s
futuristic headquarters on the banks of the
Creek waterway symbolize the strength and success
of the UAE banking sector. |
UAE banks enjoyed an impressive start in 2003.
Most banks recorded healthy results for the first
six months of the year, with heavyweights like the
National Bank of Dubai (NBD) and National Bank of
Abu Dhabi (NBAD) seeing profits rise by 21 percent
and 19 percent respectively.
Abdullah Saleh, managing director of NBD, says the
success of the UAE banking sector is largely a factor
of its international approach.
“The openness of the UAE economy makes it an
integral part of the world economy in general. Thus,
it is subject to regional and global fluctuations,
which impact the domestic economy both directly and
indirectly. However, the country’s economy has
demonstrated its resilience to absorb shocks and rebound
quickly from their effects. The overall banking sector
is in good health and is likely to stay the same in
the near future.”
Most analysts share this bullish outlook. Low interest
rates do pose a threat for wholesale banks whose loans
are priced against an international benchmark, such
as the London Interbank Offered Rate (LIBOR.) But
for retail banks, spreads are healthy. Lending rates
in the retail market have remained fairly high despite
stiff competition, while the banks’ cost of capital
has fallen much more quickly.
Since June, the ratings agency Capital Intelligence
(CI) has raised its ratings on six UAE banks, including
the Dubai-based Mashreqbank. CI raised the bank’s
financial strength rating to A-, from BBB+. The bank,
which is among the oldest domestic banks in the country,
is majority-owned by the wealthy Al Ghurair family.
“It has a healthy share of Dubai’s corporate
banking business and is regarded as a leading provider
of retail banking services,” says CI analyst
Karti Inamdar. “Mashreqbank has performed particularly
well in recent years. Its solid performance is attributed
to its sound business strategies and its good management
team. The bank has redefined its corporate banking
strategies and strengthened its risk management processes.
Consequently, asset quality has improved and the risk
charge has been reduced.” Mashreqbank is one
of 21 local banks operating in the UAE. A further
28 international banks have full banking licenses,
including Citibank and HSBC.
Clearly, high oil prices in recent years have helped
generate healthy profits for the UAE banking sector.
But the sector is not without its challenges. For
years, analysts have been warning that the UAE is
over-banked, with 49 banks chasing a population of
some 3.7 million.
Analysts worry that a fragmented system with a large
number of smaller banks competing aggressively could
lead to riskier decisions, which can lead to problems
for the banking system as a whole. They would rather
see a system that comprises five or six large banks,
with well-developed and profitable franchises, which
they argue is more stable.
Some bankers feel that international pressure from
the World Trade Organization (WTO) may force a wave
of consolidation. The WTO is pressuring the UAE –
and other Gulf countries – to remove barriers
to foreign competition. The UAE is home to 28 foreign
banks but it has not issued a new license to a foreign
bank for some 20 years. There are rumors that new
international licenses may soon be issued as WTO pressure
increases.
The UAE banking sector remains dominated by traditional
commercial and retail banks, but a new breed of investment
banks is adding life and color to the banking scene.
The likes of Dubai-based Shuaa Capital boast asset
management operations that invest clients’ money
in Gulf equity markets, and advise companies on the
limited number of flotations and rights issues that
take place. So far, it is working well: profits at
Shuaa surged 330 percent to $5.7 million in the three
months ending June 30.
“For the time being these banks are doing well
because of the fact that regional equity markets have
been doing well,” says Walid Shihabi, head of
research at Shuaa Capital. “Primary market activity
has been good, which leads to IPOs, which translates
to strong fee income. Plus you have more people putting
money into managed products.”
More conservative banks may shy away from these innovative
practices. But healthy profits across the board suggest
that the UAE’s banking sector is in good shape.
Dubai-based banks such as NBD, Emirates Bank International
and Mashreqbank are all doing well, and poised to
reap the benefits from Dubai’s fast-growing middle
class population and thriving commercial sector activity.
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