Have the banks’ horizons shrunk too? By and large they appear to be looking essentially to the domestic market although international expansion had been on the agenda in some cases, and the markets are awash these days with talk about the emerging economies and their outsized prospects. Image Credit: Supplied

Of course, it wasn't meant to be like this. Few imagined that the wave of optimism that had swept the Gulf and the UAE especially, and seemed to bring self-sustaining momentum to the burgeoning city of Dubai, would be so affected by a crisis emanating from derivatives trading, apparently unconnected, on the other side of the world.

Owing to a litany of familiar events in the past two years and more — overseas recession, capital withdrawal, debt debacles, followed by shaken animal spirits — there remains a stark contrast between those times and the current climate, even if the mood here is brightening.

For the banks, that has meant curtailments to profitability and to lending, and some serious soul-searching. Latest results hint at renewed optimism and financial improvement but the effects of the crisis experience are bound to linger.

While most observers expect the Gulf's resource wealth — and the promise of surging Asian demand for a long time to come — will stand the region in good stead, how is the financial sector itself contemplating its medium-term future? How has strategic thinking been affected among the bigger names, which might have seen only endless vistas of opportunity before the downturn?

Undoubtedly, while dealing with the aftermath, in terms of provisioning for impaired exposure, the country's leading banks have had to confront the idea of more challenging times. Ambition may naturally have been scaled back.

S&P analysts Paul-Henri Pruvost and Goeksenin Karagoez have commented that large UAE banks have generally turned to the basic business of retail to protect their asset quality and funding and liquidity positions. They have, with balance sheets to repair, been focusing on deposit-gathering and margin protection.

Playing safe

That seems like playing safe, and a decisive step back from the relentless brinkmanship of timing the stratospheric real estate market, for instance. "We do not expect a major shift from these more conservative strategies in the foreseeable future, although changes in strategy will depend on the pace of economic recovery," the analysts say. Pretty much as you might expect, perhaps.

Yet, since overextended and indebted consumers were also implicated in the collapse in confidence, overly buoyed by their winning experience with property (‘flipping' or not), the conventional retail segment has had its own dangers.

Tarik Al Mejjad, banking analyst at Nomura International, told Financial Review that diversifying away from both real estate and retail, and broadening the customer base to other sectors, "is paramount" for a healthier banking future.

Have the banks' horizons shrunk too? By and large they appear to be looking essentially to the domestic market although international expansion had been on the agenda in some cases, and the markets are awash these days with talk about the emerging economies and their outsized prospects.

"It is difficult to generalise on this [aspect]," says S&P, as the impact of the interlude of retrenchment has been different between the UAE banks, even for banks domiciled in the same emirate.

A good example is the situation in Abu Dhabi, where the rating agency conveys that Abu Dhabi Commercial Bank (ADCB) will be pursuing a more UAE-centric approach in the medium term, while National Bank of Abu Dhabi (NBAD) seems to be keen to continue its growth in countries overseas.

"Overall, the international presence of UAE banks has been limited to date, and we note relatively limited interest in further overseas expansion from key players for the time being," S&P reports.

Nomura's Al Mejjad sees no expansion within the GCC region, "given the restrictions in terms of branches [allowed] and capital", although he affirms that certain banks see opportunities in the more open markets of North Africa, most particularly Egypt".

Interestingly, the distinct dispensation of the UAE's Islamic banks means they have a quite different perspective, in tune with their specialist offering. Says Al Mejjad, "They will need to expand outside the UAE into the Far East to increase profits," tapping into a larger customer base.

Those observations might for a moment obscure the argument that for many years the UAE has been over-banked, bringing its own pressure. In that respect, things are not getting any easier with the influx of foreign banks, for instance from India, so rapidly emerging itself, and catering for a substantial, natural market among expatriate NRIs .S&P has no particular qualms on that front for the domestic operators.

"We believe that local banks still enjoy a strong brand and customer franchise and are well entrenched commercially to withstand foreign competition... With a small bankable population and concentrated real [estate] sector activity, the UAE market does not offer a lot to new foreign entrants. Overall, we believe that the level of competition in the UAE will remain high but relatively stable."

Local players may take the same view. Replying to an enquiry from Financial Review, a spokesman for First Gulf Bank said, "The overseas banks have been present in this region for a very long time — institutions such as HSBC and Citibank. The change we foresee is that their presence will force the national banks to compete internationally in their domestic markets."

How about consolidation, whether simply streamlining costs in a tougher environment, warding off whatever is the competitive threat, or being in position to participate in the region's bigger deals?

A familiar idea resurfaces, trailed years ago in the wake of the Emirates NBD merger. Some would not be surprised to see NBAD and ADCB coming together as a counterbalance. As with the Dubai bank, the two entities share a government shareholder.

Sampling the issues for the four largest banks in the UAE (exceeding Dh100 billion in assets) respectively, naturally enough a reassuringly more conservative approach gets airtime, with an increased focus on ‘quality' domestic customers. Notably, there are common themes.

Emirates NBD

Emirates NBD (ENBD), the UAE's largest bank, has had high exposure to property and also Dubai World. It has also had the task of integrating itself since the 2007 merger, not historically easy at the best of times.

For the past three years the bank's strategy has been dominated by that need, with the objective to pursue synergies, a process apparently mostly achieved by last year-end. It has done it well, considering the concurrent downturn, according to Al Mejjad at Nomura.

Raj Madha, banking analyst at Rasmala, wrote in a research note earlier this year that the key elements of strategy are "predictably defensive" now, ENBD's three prior concerns being: balance sheet optimisation, optimising revenues and risk management. They are all about "resolving weaknesses in the company's structure and resolving external threats", a focus "particularly apposite" in response to crisis.

Emirates NBD's own literature refers to "cost rationalisation" in tandem with investing "selectively" in platforms for growth, which you might call a prudently balanced approach.

Risk management — a topic much-discussed in many financial domains since the global crisis struck — aims to ensure not only that risk is monitored and controlled, but that capital is allocated appropriately. Madha described these as "important initiatives", although the impact on the financial statements is "subtle". Sensible housekeeping is the order of the day.

Upon the third-quarter results, the bank's group CEO, Rick Pudner, referred to the funding profile having improved significantly and capitalisation reached extremely comfortable levels. With economic activity expected to pick up, he highlighted private banking business and expansion into Abu Dhabi (retail is nominated) as continuing investments.

Other avenues to pursue are growth in the Emirates Islamic Bank affiliate, and extending the reach for SME (small and medium enterprise) business.

Internationally, ENBD "has gone back and forth on expansion by acquisition, but at the moment its plans have become more modest", says Madha. The bank has launched a greenfield operation in Saudi Arabia (one branch).

The bank itself, in listing its strategic imperatives for the year, includes organic growth in Saudi Arabia, but keeps its options open beyond that, intending, in the prosaic jargon, to "opportunistically evaluate inorganic expansion opportunities". In other words, something might turn up and take its interest, and the bank will keep a watching brief in case it does.


Things have been different at the National Bank of Abu Dhabi (NBAD), the country's second-largest bank. It has benefited throughout the financial crisis by being the primary bank to the government, thereby taking a leading role in the wealthy emirate's infrastructure projects.

According to Rasmala, as of 2009 54 per cent of deposits and 39 per cent of loans relate to the government and broader public sector.

With limited exposure to many of the problems afflicting the sector, NBAD has the benefit of moving into the new, circumspect era of banking from a position of strength.

In looking to enhance its market share in the retail segment, focusing on high-net-worth individuals (HNWIs), it aims to be one of the leading asset management firms in the Mena region, SME and corporate banking. In that regard it shares an inclination with other banks, but with greater reach in mind.

Indeed, without the same headwinds of rebuilding its financials, geographic diversification is an area that does seem to separate NBAD from its competitors.

In the Arab world, including recently-launched Jordanian operations, suggests Rasmala's Madha, the bank "will seek to establish large corporate balances, with blue-chip corporates and HNWIs being the primary focus".

Broadening its business is a key NBAD target. S&P remarks that it "implements a conservative international expansion strategy".

Michael Tomalin, group CEO, offered alongside the latest results, "our new ventures in Hong Kong, Switzerland and Jordan are now all operating in profit".

Closer to home within the GCC, Oman has been a key target. NBAD has been the only UAE bank operating in the country, and has "aggressively expanded", in its own words, in Oman since it opened its second branch there in 2006. Indeed, NBAD set a goal last year of doubling its presence in Oman to 14 branches by 2014, apparently "to keep pace with economic development in the country", clearly eyeing hitherto untapped potential.

The bank also intends to open a branch in Qatar. Otherwise, it is also considering entering Malaysia, an obvious Islamic finance centre.

Plans are to venture further into Africa, into Egypt and Sudan, having opened a representative office in Libya in 2009.

"Egypt remains an important and critical market for us," said Qamber Ali Al Mulla, Senior General Manager, International Banking Division, NBAD, upon opening the 28th branch in the country. A network of 50 branches is planned "over the next few years".

It seems very much like a regional emphasis. In fact, the bank is explicit. "NBAD's aim is to be the number one Arab bank, and therefore we will continue to look for opportunities in large Arab economies, as well as other international markets," Al Mulla said.

The bank now has nearly 50 units operating in 12 countries spanning the Far East to North America, Africa and the Middle East.


Abu Dhabi Commercial Bank (ADCB), the UAE's third-largest, has more reason than others to be chastened by the crisis, having been caught up not only in Dubai World's $24.9 billion (Dh91.4 billion) debt restructuring as one of the biggest lenders, but also in its exposure to Saudi Arabia's Saad and Algosaibi business groups, which defaulted on at least $15.7 billion of loans last year.

In recent years ADCB has also been burned by investments in derivative instruments.

CEO Ala'a Eraiqat acknowledges mistakes made. "We were hit harder than everybody else," he has said. The lesson "for all banks is to stick to certain diversified thresholds no matter how great the borrower is," he told Zawya Dow Jones in an interview in London earlier this year. "We learned from the lack of diversification or large concentration."

Consequently, ADCB plans to focus on its core UAE business after cleaning up its balance sheet.

"We will not indulge in any fancy investment schemes as we have in the past," he pledged.

ADCB will focus on retail, SMEs, corporate, commercial, and treasury business in its core market of Abu Dhabi and the broader UAE. Acquisitions are off the radar right now. "We're not planning any non-organic growth," Eraiqat said.

Talking in August to Financial Review, ADCB's head of consumer banking, Arup Mukhopadhyay said, "ADCB is really looking at two strong growth engines: one is of course retail, and the other is SMEs." Within the retail sector there are specific areas to focus on: "one is the credit card business and the other is the mass-affluent business."

By now that sounds familiar. But in ADCB's case a particular, headlining event makes a difference.

In October the bank concluded its takeover of the Royal Bank of Scotland's retail banking business in the UAE, leading Mukhopadhyay to claim "this acquisition has resulted in a perfect platform for building a consumer banking powerhouse in the UAE."


Completing the mix, First Gulf Bank (FGB) has another kind of tale to tell, like a rocket that has gently splash-landed.

As Madha of Rasmala put it, "after four years of driving growth at a phenomenal CAGR (compound annual growth rate) of 87 per cent, FGB shifted its attention in 2009 almost exclusively to debt collection", a variation on the victim of its own success. The bank itself said it "made significant strides in executing our stated plan of consolidation".

Moreover, having made such strides, and established client relationships, it needs to retain its most valuable clients, having to be "innovative and proactive to defend market share without compromising pricing".

That's because nearly every bank has identified Abu Dhabi, and especially the HNWI Emirati segment, as the next step forward.

One element of concern is a substantial property portfolio, mostly within FGB's subsidiary, property developer Mismak. The market had hoped that this exposure would be substantially offloaded. FGB's intention now is to develop these properties as and when the market will bear it, Rasmala notes.

FGB hopes to benefit from supporting customers through stressed times. Strategically now, its annual report says the group "will continue its organic growth" in this "slightly difficult environment". As a list, that means it "will focus on raising deposits, diversify across industries, focus on unfunded income, and plan for exigencies that may arise in the future".

The emphasis appears to be on developing "the right businesses, with a focus on governmental/infrastructure projects and diversification into select industries". The watchwords, once again, appear to be selectivity and caution.

Following "stupendous" growth on the retail side during 2009, there will be continued focus on its UAE national-centric approach, curtailing the expatriate side.

FGB provides specialised services for the Abu Dhabi Department of Finance's National Housing Loan (NHL), disbursing approximately Dh6 billion in loans to UAE nationals to date.

Internationally, FGB has been similarly watchful. "International expansion is part of our diversification strategy, built on expansion in geographies that we are comfortable with and where economies have the potential of long-term sustainable growth."

The bank is intent on playing to its strengths. "The international footprint currently operates in the corporate space — a core competency." Through this year its plan leans to developing the international presence as well as consolidating in existing locations.

FGB applied for an Algerian licence back in 2007, but "this has so far proved a slow-moving target", says Madha of Rasmala.

However, it has now successfully launched corporate banking operations in Libya, another common target, through a joint venture with the Economic and Social Development Fund of Libya.

Elsewhere, FGB is treading with care but expectation: it has upgraded its rep office in Singapore to branch status, and established representation in Qatar and India "where real potential is just being unleashed", the annual report asserts. Other international markets such as the UK and China are apparently in the frame for extending business.


In all, taking the four leading names for example, much variation obviously applies in the UAE's banking sector, with outlooks borne of a varied past.

Winners and losers there may still be, especially as aspirations centre significantly on seizing the same turf. And, if consumers were said to be overreaching in the heady upswing, how can retail be the answer to the question of where lending is sufficiently secure?

The last word is nevertheless upbeat, and can rest with FGB's spokesman, responding to Financial Review's general enquiry. "The banking sector in this region has survived the storm. We have seen lots of positive indications for recovery, [and] those of us… who managed to control their NPLs and balance sheets are coming stronger out of the recession."

A vote of confidence in the future, then. If we're talking about ‘platforms', the stage is now set for quite a performance in the years ahead, and perhaps without quite so much unfortunate drama. 

The writer is a freelance journalist.