Fast and Furious

With Dubai in general bristling with innovation, its economic stability promises to attract new businesses, further raising the population and its financial conditions. Add to this the attention that World Expo 2020 will be unleashing, and it becomes clear that the banking system is due for some fresh spoils in the years ahead. The system has long since been shored up to international best practices; in terms of financial reporting, the Central Bank in 2000 made it mandatory for all banks to publish their annual financial statement in accordance with International Financial Reporting Standards (IFRS).

WHERE CREDIT’S DUE

Al Etihad Credit Bureau (AECB)—a federal government entity mandated to enhance the UAE’s financial and regulatory infrastructure—today provides UAE-based credit reports and other financial data on the 65,000 businesses in the country to have borrowed money. Its core objective is to provide timely credit reporting enabling banks to mitigate lending risks. It can also reward transparent SMEs with kinder interest rates when lending from banks. The Bureau is also a key development in terms of the UAE’s prestige in international markets.

SOME GENERAL NUMBERS

The UAE boasts the largest banking sector in the Arab world by assets, with a 2014 print of $632 billion, a 2011-2014 compounded annual growth rate (CAGR) of 10%, and an asset/nominal GDP ratio of 152%. According to Central Bank of the UAE data, total assets of banks operating in the UAE rose 9.7% YoY by end 4Q2014 to $628.9 billion enabled by an 8% rise in credit, to $375.7 billion. In terms of customer deposits by 3Q2014 total deposits of resident and non-resident customers at banks operating in the UAE climbed 11.1% to $3.9 trillion YoY from $3.5 trillion. Resident deposits appreciated 8.9% to $346 billion YoY, while non-resident deposits rose too, by 33.9% YoY to $42 billion. Capital reserves rose 5.3% for the year as banks persisted with profit distributions during the period. Meanwhile, the total capital adequacy ratio declined to 18.2%, with a Tier 1Ratio of 16.2% at end-2014, respectively down from 19.3% and 16.9% YoY. This was of scarce concern to depositors or analysts, however, as the figures remain well above the respective Central Bank stipulated figures of 12% and 8%, confirming a stable and robust financial landscape. To be classified as a well-capitalized firm requires a Tier 1 capital ratio of 6% or above.

THE SCENERY

The banking system is divided into three broad categories, namely local banks, foreign banks operating under local rules banks from fellow GCC member states, and foreign bank representative offices, many of whom operate out of the Dubai International Financial Centre (DIFC). Of the 22 local banks operating in the UAE, seven of them are headquartered in Dubai, more than in any other emirate. As for the 28 foreign and GCC banks operating in the UAE, 20 of them are headquartered out of Dubai, while of the 120 foreign banks with representation offices in the UAE, around 70 view Dubai as home. In 2013, three new players took to the field in the form of Lebanon & Gulf Bank, Housing Development Finance Corporation Limited (India), and Banco Popular Españolq.

SELECTED LOCALS

According to Reuters, the number one bank by assets, Emirates NBD (ENBD), forecasts loan growth of 5-7% for 2015 (the upper limit would pip the 2014 print by 3pp); this regardless of deflated oil prices. Indeed, Dubai’s non-oil foreign trade printed marginal YoY growth to $362.3 billion in 2014. ENBD arose from the 2007 merger of Emirates Bank International (EBI) and the National Bank of Dubai (NBD), in a strategic move to mitigate impact of the global financial crisis on the Emirate’s key banking institutions.

FY2014 total assets stood at $102.4 billion, while profit skyrocketed 82% after the bank reclassified its debt pertaining to the stalled Dubai World infrastructure project as “performing.” In 2013 ENBD—the flagship bank of, and 56% owned by the Dubai Government—had bought the Egyptian business of BNP Paribas, and is today contemplating the Indian market. One obstacle to that particular move could be the Indian banking regulator’s stipulation that only reciprocal banking licenses be granted, enabling Indian banks to set up shop in the UAE. The latter is already a hugely competitive pond where 49 lenders vie for the business of 8 million customers.

A remnant of the global credit crunch, the $1.3 billion support package received from the UAE Ministry of Finance was repaid by the ENBD in July 2014. In 2014 net assets were up 6% to $98.8 billion, net total loans of $66.9 billion were up 3%, while total deposits of $70.2 billion were up 8%. Meanwhile, revenue of $4 billion was up 20% YOY and net profit printed at $1.4 billion, up a huge 58% YoY. The financial giant posted healthy capital ratios where CAR and Tier 1 capital printed a respective 16.4% and 15.0%. Notable recent emphasis on boosting customer service has seen large hiring and branch conversion. This was not unnoticed in 2014 when ENBD picked up the “Best Branch Customer Service for 2014″ gong from Ethos Consulting’s UAE Banking Benchmark Index.

Dubai Islamic Bank (DIB), the largest Islamic Bank in the UAE has garnered three awards at the Islamic Finance News (IFN) Awards 2015, namely for “Pakistan Deal of the Year” for two consecutive years, the “Mudarabah Deal of the Year” and the “Ijarah Deal of the Year.” DIB was the third largest bank by assets in the Emirate (2014: $33.8 billion, up 9% YoY), extended net total loans for 2014 of $20.1 billion, up 3% YoY and printed total deposits of $25 billion on a rise of 17% for the year. The bank posted robust YoY growth in core financing assets 32%, where consumer banking (40% of financing) grew over 23% despite stiff competition. Meanwhile, the corporate banking component (35% of the total) soared 36% for 2014. For 2015 the bank targets further loan growth of between 15%-20%, a non-performing loan ratio of NPLs 6%, a return on assets (ROA) of 2.5%. The net interest margin (NIM) is forecast at 3.6%, with return on equity (ROE) foreseen at 18%-19%. An ROE of 17.9% was close to 4pp up YoY, while ROA registered at 2.4%, up from 1.6% in 2013. Sukuk investments for 2014 did particularly well, appreciating healthily on by 38% YoY to $4.4 billion.

Mashreq Bank, as the largest private sector bank in the UAE, also reflected the sunnier climate of the Emirati economy, seeing total assets for 2014 of $28.9 billion, up 18% YoY Meanwhile, among other key metrics, total net loans of $15.8 billion rose 15%, and total deposits of $15.8 billion were 17% higher YoY. The bank operates both conventional and sharia-compliant windows through its Mashreq Al Islami subsidiary, confirming its asset quality with one of the lowest NPL ratios among the local banking sector of just 3.7% as at YE2014.

With a firm focus on commerce, the bank operates around 20 branches and representative offices across the MENA region, in addition to Europe, North America, and Asia. Also recognized as an innovator in the UAE, among its many firsts Mashreqbank pioneered consumer loans, ATM cash dispensers, debit/credit cards, and international Visa connectivity across the world. It was also the first institution to launch a fully Europay, MasterCard, and Visa (EMV) Chip & PIN compliant mobile POS solution. ROA and ROE at YE2014 respectively came in at 2.5% and 15.7% for the period. Revenue of $1.6 billion as at FY2014 was 21% higher YoY, while on an annual rise of 33% net income registered at $653.4 billion.

Commercial Bank of Dubai (CBD), with close to 17 branches in Dubai, has seen healthy growth figures of late. Total assets for 2014 stood at $12.8 billion stood at up 5% YoY, while for the period total net loans of $8.7 billion were up 6%, matching total deposits, themselves up 4% YoY. Revenue of $599 million was improved YoY by 10%, while net profit printed a dynamic 19% rise to $327 million.

Operating income for YE2014 was 10.2% up at $599 million. The bank’s CAR remained strong at 18.1%, while return on average assets rose to 2.6% for FY2014 from 2.4% for 2013. Return on average equity rose to 16.7% for the YE2014 from 15.1% for 2013, while the cost to income ratio printed a healthy 33.7%. Operating Income grew 10.2% YoY from $553 million to $599 million, chiefly on a 9.3% rise in NIM to $435.6 million (2013: $394.7 million) and a 12.5% increase in non-interest income to $179 million (2013: $159 million). The Bank’s personal banking strategy has fortified the sales & distribution network, as well as digital banking. As a result, the personal banking loan portfolio rose 35% for FY2014. Its cost to income ratio was at 33.7%. Gross loans rose 35% YoY from $898.4 million to $1.2 billion as at end-December 2014. CBD’s capital adequacy and Tier 1 capital ratios respectively registered at 18.1% and 16.8%, thus well in excess of regulatory stipulations of 12% and 8%.

The past decade or so has seen Royal Bank of Scotland (RSB) increase its international footprint as the UAE’s soaring economy amid appealing loan potential to large state-controlled companies such as Dubai World and Dubai Group. Yet recently, RBS has slimmed down its involvement in the UAE as part of a wider withdrawal from the corporate debt and debt capital markets lines in the MENA region. Accordingly, in April it announced selling roughly $816.8 million of loans belonging to companies in the UAE CBD. According to Reuter’s the loans sold to CBD were mostly extended to large UAE-based companies of excellent credit profiles.

The Local banking universe is crowded yet liquid and well regulated, with a watchdog and credit rating agency that have fostered financial prudence and transparency.