Business | Banking
Dubai up and running in regional bank race
The sun may be setting on an era of banking in the UAE and region, as a lone runner has broken from the pack, forcing the pace.
- By Andrew Shouler, Financial Editor
- Published: 23:37 May 3, 2009
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At a glance: Emirates Bank and National Bank of Dubai
At a glance: Details of Emirates Bank and National Bank of Dubai
Dubai: The sun may be setting on an era of banking in the UAE and region, as a lone runner has broken from the pack, forcing the pace.
The decision of Emirates Bank International and National Bank of Dubai to merge potentially creates the largest bank in the Middle East, and may spark a trend to consolidation which has been expected for many years.
Whereas banks in the UAE have been comparatively strong, so that the sector's description as 'overbanked' does not carry a connotation of systemic weakness, nevertheless the logic of such structural overhaul has not been refuted.
Analysts have been waiting for the gun to be fired. The subject has been discussed for as much as a decade.
So, without necessarily getting them all in the same room, it's an opportunity to test whether the rating agencies all see it the same way in terms of the new bank's rationale and the resulting prospect for the banking scene.
"This is something the central bank has been encouraging since the mid-90s, to prepare for competition," says Karti Inamdar of Capital Intelligence. The UAE has roughly twice as many banks as the other GCC states, and is one of the most fragmented systems in the Middle East region.
A situation of over 40 banks in the domestic space has been perpetuated not only by their general, ongoing profitability, but also by the country's distinction as a federation of emirates, with natural separations of business.
As Inamdar puts it, "Dubai banks do the bulk of their business with Dubai and Abu Dhabi banks with Abu Dhabi." Yet, that may not be regrettable in itself. "It actually helps the federation work," she argues, because each emirate "is allowed to function independently."
Rivalry too has impeded change. "That's always an issue, whether in the Middle East or, for example, Europe," says Mark Young of Fitch Ratings.
As Dubai seeks to forge ahead in its financial development as a regional centre, that the latest impetus has materialised here is only to be expected. "It is no surprise the first move has come from 'Dubai Inc', which is far more proactive than the rest of the GCC, particularly in recycling liquidity," says Anouar Hassoune of Standard and Poor's. "It's a prerequisite for exploring regional status." Confirming that it is not a defensive manoeuvre, Inamdar notes it is the first time such a deal has not been 'rescue-related'.
Rationale
So what's the immediate rationale for the decision?
Both institutions based in Dubai, at last year-end EBI reported total assets of Dh95.9 billion ($26.1 billion), and NBD assets of Dh69.3 billion ($18.9 billion). It is still, says Young of Fitch Ratings, "more a merger of equals than a takeover".
In terms of profile, "EBI has always been ahead of the competition in terms of strategic thoughts," says Hassoune. "For instance, they expanded into the retail market and their brokerage subsidiary before others. On a stand-alone basis NBD has been more conservative. Its liquidity used to be extremely high; it was less systemically-important than EBI, which was less risk-averse, more innovative."
There's a slight difference of opinion on how the move was made. "This is a bottom-up, not top-down, decision," says Hassoune. "The rulers of Dubai have to provide their approval, but are not involved in the managing of the banks." At Moody's, however, the feeling is that the government, with about 77 per cent stake in EBI and a 14 per cent stake in NBD, "appears to have been a catalyst."
Either way, the bigger bank is responding to need. "It is not only gearing up for [the requirements of] WTO, but also to meet the demands that Dubai itself will have over the long term," says Inamdar. "Liquidity ratios have been tightening, and funds are needed to match credit growth."
In that sense, it is not necessarily about bringing down costs. "NBD will bring good liquidity, while EBI will bring its marketing skills," she continues.
"The single obligor limit (seven per cent of capital) of the merged entity will obviously increase, enabling the bank to lend to top-tier entities in the region. The advantages of scale are enormous."
What are the drawbacks? Rationalisation and redundancies are the obvious thought, but the consensus is that the industry's continuing growth will absorb the fallout.
"It's an issue only for countries like in Western Europe growing [in nominal terms] at two to five per cent. Growing at 30 per cent, the UAE doesn't have that kind of issue. There is actually a shortage of the manpower needed," asserts Hassoune.
Cultures
How about any cultural clash? That has often featured in the history worldwide of bank and corporate mergers. Besides the complementarity of the two banks in terms of business, that's where a strong shareholder comes in useful, Hassoune avers, "which is there in the form of the Dubai government."
The strategic benefit is clear enough.
"The merged entity would enjoy leading market shares in a number of business lines in the domestic market," says Moody's, and "could enjoy a significantly enhanced franchise", it says in classic agency-speak.
More colloquially, creating critical mass "is definitely positive", says Young of Fitch Ratings, though it will be tempered by the risks and sensitivities of integration. "The new bank will have 'first-mover advantage', although for a while it will be 'internally-focused', which helps others compete. It will be inherently more competitive because of its size; it will have clout."
"It is a stepping stone," since EBI-NBD is "now large enough to be important regionally," says Inamdar.
"It will definitely be able to go on and [make acquisitions], and cross-border," says Hassoune, although it will take 12-18 months operationally to settle down. "They would look beyond the Gulf into such countries as Turkey, Pakistan, even Iran and India," he suggests.
Precedent
So where does it leave the rest of the banking system? "It is definitely setting a precedent," says Karti Inamdar of Capital Intelligence.
Thoughts turn immediately to the federal capital. "What Dubai does today, Abu Dhabi seems to do tomorrow", she notes, "although there is actually no real need for it".
"Abu Dhabi mergers are already on the agenda," Hassoune claims. "Something could happen there, but also in Saudi Arabia."
Moody's notes the relevance of common shareholders, and welcomes the merger prospect for its contribution to a competitive environment, "with stronger and more diversified institutions" both domestically and in regional markets.
Mark Young of Fitch Ratings agrees it could herald a spate of activity. "Other CEOs will be looking over their shoulders now, and their banks will have to reposition themselves."
For the banking system in total, it's beneficial, he adds. "Most developed systems have key pillars of four or five institutions, which make them easier to manage, and less risky."
For smaller institutions, it's a test. They are "generally excellently-managed, but might find it more difficult to compete," says Inamdar. "They will have to specialise, merge or disappear," insists Hassoune, although there is plenty of room still in the Islamic sector.
Foreign banks do not seem to enter this picture. "They will find it very hard to join forces with locals," says Hassoune.
There's a reason, namely the objective of a pan-Arab banking giant. "There is a strong economic and political incentive for that goal," he says, "but it is only possible with $5-10 billion of equity."
The model in everyone's mind is Arab Bank, whose capital ranking leadership was taken over by National Commercial Bank of Saudi Arabia last year, a position now filled by the Dubai merger.
Hassoune recognises that vision, but has reservations. "It is the right time now to act, but it is a turbulent region, and the whole process could be difficult to manage. Middle East banking involves subtle differences in cultures, regulations and laws, and economic development." Inspecting GDP per capita gives one idea of how daunting is the challenge. "Morocco is at one end with $2,000 and Qatar at the other with over $50,000." Alternatively, look at the spectrum of sovereign ratings, with Lebanon implicitly close to default at B-, while Qatar is at AA-, which is higher than EU-member Greece.
Marathon
Dubai has been quick out of the blocks on this marathon. "[It] has a very clear plan for the future," says Inamdar. "The merger is in keeping with Dubai's ambitions to become a global player."
Meanwhile, it's a jolt to the domestic system at the very least. "The top banks in the UAE have been oligopolistic," says Hassoune of Standard and Poor's. "You cannot really see price competition between them. They compete instead on identity [whether big or small, niche or universal, Islamic or conventional]. This new entity is aiming to be big and universal."
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