Strength in Prudence


As the world plays catch with a hand grenade at the edge of a volcano, there has never been a more prescient time to seek out relatively safe financial havens. […]

As the world plays catch with a hand grenade at the edge of a volcano, there has never been a more prescient time to seek out relatively safe financial havens. Indeed, such a status has been a USP of the UAE’s financial universe in recent years, where the banks of its capital Abu Dhabi continue to loom large. Meanwhile, strong regulation and Basel-flavored compliance will ensure that the well-capitalized banking arena is also one of prudent behavior. It might need to bend a degree regarding credit, as the nation’s SMEs, vital to the economic diversification of key sectors, will increasingly demand more competitive options. The Emirate has also seen telling structural and corporate machinations that confirm a firm grasp of the long game.

The Central Bank

The groundwork has certainly been laid by the Central Bank of the UAE (CBUAE), and recognized, too, by the World Economic Forum’s 2016-2017 Global Competitiveness Report. Accordingly, the UAE ranked 16th overall among 138 countries on a print of 5.26 out of seven, up from 17 and 5.24 YoY, retaining dominion over the MENA region. Moreover, the UAE ranks 28th for financial market development for the period. Meanwhile, it ranks 13th for financial services meeting business needs, 24th for the affordability of financial services, 21st for financing through the local equity market, 16th for ease of access to loans, seventh for venture capital availability, and lastly but certainly not least, 17th for the soundness of banks in place, up from 21st place previously.

In conversation with TBY, Mubarak Rashed Al Mansoori, the CBUAE’s Governor, touched on key topics ranging from economic diversification to fiscal policy and ongoing sector reform. Regarding the former, the bank estimates the nation’s non-oil activities rising by around about 2.7-2.8% in 2017 with precision manufacturing having blossomed in the Emirate. Abu Dhabi’s Economic Vision 2030 envisages the development of strategic sectors capable of luring foreign investment, notably in export-oriented sectors including manufacturing, telecommunications, transport, tourism, and energy. The bank’s 2017-2021 strategy also maintains a commitment to the fixed peg of the dirham’s exchange rate against the US dollar, whereby in parrying the blows of external shocks, and reflecting the direction of US interest rate policy, “Our focus is on the liquidity needs of banks with a forward-looking agenda.“

The Cost of Regulation

The regulatory framework underpins the nation’s international reputation as a prestigious financial services provider. Yet a tough nut to crack is knowing when to activate macro prudential instruments to mitigate global shocks to the local economy, and when to foster a more liquid climate conducive to funding private sector activity. Certainly it seems that general liquidity will be pressured over the coming years as fresh regulations boost operating expenses of banks. The IFRS9 Standard to be introduced in January 2018 demands that banks risk-rate every new loan and immediately provision for it, again denting earnings. It is no stretch to foresee SMEs struggling to secure credit under such conditions. Meanwhile, as the sector marches towards Basel III standards for capital and liquidity, risk management at banks is under scrutiny. And this year, work may be expected on “a new overarching Corporate Governance regulation for consultation with the banking sector.“
Tirad Al Mahmoud is the CEO of Abu Dhabi Islamic Bank (ADIB). In conversation with TBY he touched on the UAE’s new Bankruptcy Law, which he felt “marks the beginning of an evolution (being) a positive aspect of any sophisticated economy.“ His interpretation was that advanced legal frameworks would underpin “a period of suspicion, where if an individual or commercial entity declares bankruptcy, a legal entity may investigate their assets anywhere from 12 to 36 months before their declaration.“ This will provide the banks and regulatory agencies “a rearview mirror to properly assess the validity of bankruptcy claims.“

Some Numbers

The CBUAE’s 2016 Annual Report reveals its total assets declining from AED393 billion in 2015 to AED364 billion in 2016. The largest asset on the consolidated balance sheet was held-to-maturity foreign securities, which at AED149 billion in 2016, had slipped from 2015’s AED164 billion. Fluctuating deposits with the Central Bank rose 25.3% YoY from AED76 billion in 2014 to AED96 billion in 2015, only to fall to AED61 billion by year-end 2016. A continued uptrend was observed in cash and bank balances held by the Central Bank, which skyrocketed 87.16% YoY from AED42 billion at end-2014 to AED78 billion for 2015 and to AED90 billion at end-2016. Meanwhile, derivative assets fell hugely during 2015—one of the only balance sheet items to do so—to just AED334 million from AED7.53 billion a year earlier, recovering strongly to AED8.746 billion at end-2016. Gold bullion at AED940 million at end-2015 rose to AED1.015 billion a year later. The deficit of the UAE’s financial account, widening by AED77.6 billion in 2016 to AED89.5 billion, at 6.6% of GDP, largely reflected banking sector activity.

The Landscape

Moody’s outlook for the UAE is welcome, where good sector performance is ensured by stable core income from higher fees and commissions. Accordingly it expects the core profitability of the UAE’s five largest banks (as of December 2016 accounting for 62% of the total banking universe by total assets) to remain firm over the next 12-18 months. Incidentally, Emirates NBD, the National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank, and Dubai Islamic Bank posted a combined net profit of AED6.8 billion in 4Q2016 (-2% QoQ). Their combined Tier-1 capital ratio inched up QoQ to 17.3% from 16.9%. In the fourth quarter, banks’ overall profitability was resilient, despite a decline in UAE’s non-oil real GDP growth to 2.5% in 2016 from a 2012 peak of 6.4%, weighed by weak oil prices. Banks’ fourth quarter performance was underpinned by higher fee and commission income from retail and corporate lending services. And for 2017, Moody’s foresees pressure arising from higher funding costs amid further-squeezed liquidity, with the persistent economic slowdown also applying the brakes. Another metric of importance in the UAE Vision 2021 is Emiratization. “The banking sector (was) already employing 38,000 Emiratis as of the end of August 2016,“ thus comparing favorably with other private sector industries, according to the CBUAE governor.

According to the UAE Banks Federation, UAE banks can expect a 10-20% decline in profit for 2017 as oil prices remain deflated and tourism numbers fall on global concerns. It anticipates sector profit to be either flat, or else within the plus or minus 5% range, with loan growth falling from 2016’s 4.5% to 3.5%. Yet by global comparison, says the Federation, the UAE’s banking sector is set to fare better than those of Europe, Japan, and the US, thanks to excellent ratios; a 16.5% capital adequacy ratio outperforms the global 12.5% minimum. NBAD reported a net profit of AED5.296 billion for FY2016, yet the performance was somewhat offset by volatility in financial and currency markets, both overshadowed by political and economic question marks.
Institute of International Finance (IIF) numbers indicate that the UAE’s credit growth slipped to 6% YoY in 2016, from 7.8% with a single-digit forecast for 2017. This is attributable to the key borrowers such as the state investment holding Mubadala, “deleveraging significantly, as the Abu Dhabi government finances its budget deficit through its Sovereign Wealth Fund, rather than through bank borrowing.“ Yet the IIF notes that despite more moderate activity and rising interest rates, these concerns are mitigated among the Emirate’s banks by a high capital adequacy ratio of 19%.

The Appeal of Diversification

Banca Intesa Sanpaolo, Italy’s largest bank by market value, is extending its corporate and investment banking footprint through branches in Abu Dhabi and Doha to ride the wave of diversification supporting key sectors. It is also the first Italian bank in the UAE operating an onshore branch. Italian banks capable of bearing the cost are themselves diversifying away from the hugely dented Italian banking sector plagued by the bad debt not seen in the UAE. Furthermore UniCredit, Intesa’s closest competitor in Italy, is set to open a branch in Abu Dhabi’s new financial district. Which leads us to…


The Abu Dhabi Global Market (ADGM), a financial free zone launched in 2013, is an exercise in long-term thinking as inscribed in the Abu Dhabi Vision 2030, and one that has leveraged sustained economic and financial sector performance afforded by hydrocarbons. Of note, in 2016 an MoU was signed between the ADGM and the Abu Dhabi stock exchange (ADX) for cross pollination to expand the commercial appeal of the Emirate.

No Fooling Around

April 1, 2017 saw finalization of the merger of listed National Bank of Abu Dhabi (NBAD: net profit of AED5.296 billion for FY2016) and First Gulf Bank (FGB: net profit AED6.03 billion for 2FY2016) into the new entity First Abu Dhabi Bank, thereby creating a true colossus. Now the largest bank in the UAE, with assets of roughly AED183 billion, the new institution alone accounts for 27% of the nation’s banking sector. Moreover, it is the second-biggest bank by assets in the Middle East after Qatar’s QNB. As such, it is primed to extend the UAE’s financial reach and thereby foster economic growth. Headquartered in Abu Dhabi, other impressive numbers include USD27 billion in equity, an MCap of USD30 billion, a tier-one capital ratio of 16.5%, and presence in 19 countries beyond the UAE itself. Despite estimated cost synergies of AED1 billion being twice the initial estimate, they are spread over three years, during which operational expenses are set to decline tangibly. In fact, confident of future profitability, the bank expects a return on equity of 16-17% by 2020. Predictably then, the shares of First Abu Dhabi Bank (traded as NBAD) had rallied more than 9% in the first week of trading on the Abu Dhabi Securities Exchange. And meanwhile, Moody’s maintained its long and short-term foreign and local currency deposit and debt ratings for NBAD at Aa3/P-1 post-merger.

Abu Dhabi’s financial prestige will likely stretch further, as Bahrain’s GFH and Dubai’s Shuaa Capital have begun talks over a potential merger that would result in an investment bank with assets of over USD3.65 billion. Abu Dhabi Financial Group (ADFG) is the biggest shareholder of both institutions. In short, with reforms and compliance slotting into place nicely, the local sector’s future, so far as any of us can now foresee it, is secure.