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15 April 2024

UAE banks face stiff competition from overseas

By Mohamad Al Kady




Increased competition in the UAE banking sector is inevitable and it is unclear whether or not local banks will be strong enough to meet the challenge, said a report on the sector by the National Bank of Dubai (NBD) that looked at the likelihood of expansion and whether or not the country is currently over-banked.

NBD predicted World Trade Organisation (WTO) and other free trade agreements would draw an increased number of international banks into the market and drive domestic banks to consider expansion.

“As long as the profitability of banks and financial market stabilities can be ensured, then the right decision is to open up the sector for competition to achieve better efficiency in the banking sector,” the report said.

There are currently 47 commercial banks and nine representative offices of banks with a total of 697 branches in the UAE. Citing figures by the Arab Monetary Fund, the report found the UAE has the second largest bank capital in the region after Saudi Arabia. The performance of banks in the UAE has been showing steady growth and they are likely to become top players in the region, the authors concluded.

Given that environment, opening up the financial market was presented as inevitable and the report predicted other GCC countries are likely to open up their banking sectors to cross-border branches.
However, as indicated by UAE’s Central Bank Governor, free access will not be automatic and the bottom line will be the profitability of banks and the stability of the market.

Financial analysts have agreed the WTO and free trade agreements will shake up banking and financial services in the UAE in the medium to long term, predicting that international players have a strong appetite for a piece of the action and are looking to benefit from the UAE’s booming economy.

Saket Al Jendi, a financial expert, told Emirates Business the UAE’s financial market has great potential for expansion and foreign banks are likely to flow into the country and the whole Middle East region. “GCC banks will also have the opportunity to enter the UAE banking sector. The UAE market enjoys high growth rates and high liquidity.”

He added that new banks coming to the country would fuel competition in the sector. “But this competition will have a positive impact on the market. International banks will come here with their strong assets, advanced banking expertise and customer services. This will push local banks to improve their services to survive in the market and in the end this will improve the whole financial market.”


The NBD report said the UAE Central Bank is likely to open up the market for more foreign banks to operate in the country as it believes there is room in the market for growth. “Given the commitments under the WTO agreement and the proposed free trade agreement with the United States, the UAE is likely to further liberalise its banking and financial sectors. The Central Bank seems to presume that the UAE financial market is not over banked because the economy is becoming larger and larger every year,” it said.

But NBD noted that the current declining trend in interest spread and the likely pressure that might arise from opening up the market for increased competition from domestic as well as foreign banks will be a challenge to the banking sector – making it difficult for the Central Bank to manage financial stability in the UAE.

The NBD report also explored whether the UAE financial market is over-banked or under-banked: “If it is over-banked, any expansion policy is likely to erode the profitability and potentially prompt financial instability in the market. However, if banks still find it a good investment to operate their offices, then the UAE is now under-banked.”

Hani Hussein, vice-president and head of asset management and equity research at Damac Investments, said the UAE is not over banked and foreign banks would like to enter the market and open new branches here.

“In the 2003 to 2005 period, we saw major local banks including National Bank of Abu Dhabi, National Bank of Dubai and Abu Dhabi Commercial Bank, achieving between a 100 per cent and 120 per cent hike in their profits. International banks never achieved such growth rates in their profits so they will be interested to open branches in the UAE to benefit from high potentials.

“Profits will not be the only factor attracting foreign banks. They have long-term investment strategies and assessments of potential markets for the next 20 years. So they will be coming to have a strategic presence in the region, where expectations are very high for expansion and growth,” Hussein added.

The NBD report found profitability and financial stability criteria would primarily determine foreign and domestic banks’ decisions on further expansion.

The deposits and loans per branch increased by 60 to 70 per cent during the period 2003 to 2006, NBD said. Profit per branch dramatically increased by 140 per cent during 2003 to 2005, but in 2006 and 2007 the profitability seems to be declining or at best stagnating. Similarly, the capital on assets ratio (CAR), return on equity (ROE) and return on assets (ROA) peaked in 2005 and started either to decline or stagnate.

Declining provision for non-performing loans in 2006 to 2007 must be carefully monitored to make sure that it is not a generic problem of provision being sacrificed to increase the accounted profitability, said the authors. But they added that it is too early to conclude that the profitability of banks is under stress.

Saket Al Jendi agreed growth rate in profits of banks was very high compared to international standards. “Primary statistics showed that the overall growth rates reached 23 per cent in 2007, when there was a slowdown in growth rates of profits. But we should notice that the growth rate in major banks with around Dh2 billion profits was lower.
When small banks, sometimes achieve Dh100 million profits and double this number in the next year, they increase the growth rate but not the growth volume.”

Hussein added the decline in growth rates of banks’ profitability during the last two years came from the sharp losses in local and regional stock markets. “This is a short-term situation, but we must assess medium- to long-term potentials of the financial market.”


The NBD report said mergers do occur to achieve expansion in an over-banked market, and the merger announcement by Emirates Bank and NBD has made the industry think in terms of more mergers. There is a general belief by some analysts that the UAE is over-banked but then the above merger need not necessarily be a marker.

“The UAE market is not under-banked either,” the report said. “Declaring a market as over or under-banked is not an easy task, especially in a dynamic environment where the macroeconomic fundamentals are changing rapidly. Based on the predicted sound macroeconomic and banking fundamentals such as economic growth, continued liquidity boom, core banking operations and increasing financial penetration, one may be tempted to predict a positive outlook.”

Experts said the market being over or under-banked is not the primary driver for increasing calls for mergers among banks in the UAE. Jendi said the majority of UAE banks are small, and will never survive international competition. “Mergers among banks are inevitable because the market will be open for foreign banks and GCC banks. New comers will take an important stake in the market and this will have massive impact on small banks.”

Hussein also stressed the need for immediate consolidation of the UAE banking sector. “We have around 50 banks but the majority are small and medium banks. Mergers or acquisitions are the only solution to protect local banks. We need a smaller number of banks but with stronger assets and abilities. The competition will push them not to expand in the local market, but also to expand in regional and international markets.”

Concerning risks of sub-prime mortgages, the NBD report called on regulators to tighten oversight while preserving the viability of the securitisation model. “The new loan origination and funding technology employed in the sub-prime area has protected depository institutions from significant losses at the risk of greater dependence on capital market liquidity and the expense of undermining consumer protection,” it said.

Jendi said a large number of international and local banks did not carry out proper assessment of borrowers’ financial abilities or debt service-to-income ratio and this led to the recent international sub-prime crisis. “If local banks continued to practice loans and financing of property in the same way, we will see a similar crisis in the UAE.”

However, Hussein was not as grim and ruled out the potential of such a crisis in the UAE banking sector. “According to Damac studies, the UAE property market is a cash delivery market not a mortgage delivery market. People are buying properties here to invest in them not to live in them. Also the ratio of mortgaged population is less than seven percent of the total population and this is a very low ratio compared to the US or European countries.”

He insisted there are no fears of a sub-prime crisis in the UAE in the short to medium term.