FIRMLY ROOTED IN SHIFTING TIMES

Abu Dhabi 2019 | FINANCE | REVIEW

Foreign investors have long viewed the UAE, and by extension its financial sector, as a bedrock of stability in a turbulent region, and one of considerable growth potential.

2018 came with a widespread deterioration of investment sentiment in many of the Emerging Markets grouped under the MSCI Equity Index. However, within the UAE, the Emirate of Abu Dhabi has grown to become a more sophisticated, diversified market built on a very solid foundation which has proven to be extremely attractive for capital inflows.

Ranked sixth in the world, the UAE overall holds around USD500 billion in offshore wealth, with the major share derived from Saudi Arabia, Iraq, and Iran. Glancing onshore, the Central Bank last year performed its regulatory stress test to gauge the resilience of local banks to macro-financial shocks over a three-year horizon. The conclusion, a positive one, was that the system had adequate capacity to withstand adverse turbulence. Indeed, systemic stability has been the verdict for the UAE, Saudi Arabia, and Kuwait, three nations that account for 75% of GCC banking assets.

The Central Bank's Financial Stability Report for 2017 also indicated that the nation's stable macroeconomic and financial-market conditions had yet to reflect in credit expansion in the domestic retail or corporate arena. Back in May 2015, the Central Bank had introduced a liquidity coverage ratio (LCR) glide path as part of a gradual migration to a Basel III regulatory framework, with full implementation by 2019. Meanwhile, International Financial Reporting Standard (IFRS) 9 was implemented throughout the nation's banking sector as of January 1, 2018.

Narrowing Our Scope
The UAE banking sector is host to 22 local and 27 foreign banks. The total 4Q2017 net income of Abu Dhabi-headquartered banks printed at USD2.1 billion, with 83% derived from commercial banks and 17% from Islamic counterparts. Despite a recovery in oil prices of late, major producer Abu Dhabi has felt hydrocarbon-related tremors across its economy, with the banking sector taking remedial steps. This has resulted in pronounced staff cuts and the prospect of consolidation of the banking universe. In fact, official figures show that in the past couple of years banks in the Emirate cut around 1,700 jobs, with the employee count falling from 13,200 at end-2016 to 11,900. Local banks are not alone in downsizing, as foreign players such as Royal Bank of Scotland, Lloyds, Barclays, and Standard Chartered have also tightened their operational belts in the UAE.

Regional Leader Arises
Last year's leading story in the sector was the merger (only the UAE's third) of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), effective on March 30, and a real economic shot in the arm at a time of economic sluggishness. First Bank of Abu Dhabi (FAB) is the nation's largest financial entity with assets of USD183 billion, a full quarter of the entire Emirati banking universe. It is also the region's second-largest lender after Qatar National Bank (QNB). The combined results of the new entity began reporting in 2Q2017. And as of 1Q2018, net profit stood at AED3 billion. Its credit ratings, the highest of any bank in the MENA region, sum it all up perfectly at Aa3, AA-, and AA1 from Moody's S&P and Fitch, respectively.

The Abu Dhabi government and state-owned bodies retained around 37% of the new entity, with FGB shareholders holding roughly 52% of the combined bank. On April 1, 2017, the combined lender commenced trading on the Abu Dhabi Securities Exchange (ADX) under the NBAD ticker. As of end-March 2018, its market capitalization (MCap) was USD34.7 billion. Under NBAD livery, the behemoth became strongly positioned to challenge foreign banks and expand its international footprint. While its domestic network spans 89 branches and 584 ATMs across the UAE, it enjoys a global presence in 19 countries beyond the country.

Further Consolidation?
Observers also asked whether it would ultimately spark further consolidation among remaining banks. They contrast the UAE banking sphere with Saudi Arabia's 25 banks catering to around 33 million people. Speculation has surrounded the potential mergers of Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB), and Abu Dhabi Islamic Bank and Al Hilal Bank, without development to date. Indeed, now is a period of observation by the market.

The Stock View...
With an MCap of USD125.52 billion, the Abu Dhabi Securities Exchange (ADX) has a 32% ratio of GDP. As of August 5, 2018, its MCap accounted for 11.77% of the GCC markets' combined MCap. At the same time, the YtD return had printed at 9.27% and the 1-year return at 10.42%, while the 52-week range was at 4,244.50-4,862.86. On July 25, 2018 the index had hit a three-year record high of 4830.42 on a daily gain of 1.12. Historically, the ADX General reached an all time high of 6237.98 in April of 2005 and a record low of 1001.81 in July of 2001.

...and a Key IPO
A barometer of the global economic events, in 2017, the benchmark index, the ADX General shed 3.3% for the year. However, listed companies market cap in ADX, the region's leading financial market together with Saudi Arabia's Tadawul, reached USD146 billion, by the end of August 2018, with a remarkable increase in the general index by 13.4% from the start of 2018. Last year saw the notable IPO of the Abu Dhabi National Oil Company's (ADNOC) fuel distribution unit, the largest listing on the Abu Dhabi bourse of the previous decade. The deal, in which ADNOC raised USD851 million from the 10% stake listing, was touted as confirmation of the UAE's resilient growth fundamentals.

Insurance
Regional noise such as conflict and less dramatic factors such as the introduction of VAT have together weighed on the MENA region's insurance market. And clearly, the new era of cheap oil prices has taken its toll, too. Yet for 2017, the net profit of the UAE's listed insurers soared 45% due in large part to compulsory medical insurance rolled out across the GCC. By 2021, the UAE's insurance market is set to appreciate to USD18.1 billion. Ongoing sector reform is aimed at greater operational competitiveness, and also at greater local retention of the reinsurance business.

Like their banking counterparts, the UAE's 61 registered insurance companies make for a crowded pool, according to the Insurance Authority (IA). The top five retain over a 50% market share. The penetration of both non-life and life insurance remains problematic in the MENA region, at below 2% on average and at one-third of the global average by industry data. While Morocco had the highest penetration rate of 3.5%, Egypt had the lowest of 0.6%, while the UAE was just shy of 2.9% in 2017. Meanwhile in the Islamic financial arena, Sharia-compliant health and life insurer Takaful Emarat bought Al Hilal Bank's Islamic insurance business unit to form the UAE's largest takaful entity.

ADNIC, A Profitable Example
Established in 1972, Abu Dhabi National Insurance Company (ADNIC), a guiding light among regional multi-line insurers, has printed a healthy 1H2018 performance. Gross written premiums rose 14.7% to AED1.81 billion from the same period of 2017, while its overall premium retention ratio climbed to 53.2% from 43.7%. Meanwhile, net profit gained 17.1% to AED150.5 million, up from AED128.5 million YoY.

As the capital of the UAE, Abu Dhabi's financial sector is the flagship of a nation that seeks to further grow its economic diversification and that enjoys a clean bill of health, regardless of the uncertainty that plagues the wider region.