Image Credit: Supplied

As an analyst covering the UAE banking sector for several years, I have watched with interest the metamorphosis of the banks in the northern emirates.

In the early 1990s the Central Bank of the UAE had actively encouraged the consolidation of the local banking sector, and the financial sector was rife with rumours about impending takeovers and mergers. The general wisdom was that it would be difficult, and perhaps almost impossible in a challenging operating environment, for small banks to compete with the larger banks in the country.

I too expected at least two of the four Sharjah banks to merge to create one large institution of a meaningful size. It seemed like common sense that the two banks incorporated in Ras Al Khaimah should combine to form one bank. As for the banks in Fujairah and Umm Al Quwain, the most logical thing would have been a takeover by one of the big banks in Dubai or Abu Dhabi.

But amazingly, as if to defy logic, all the banks in the northern emirates have not only retained their original identities but have also thrived by carving out lucrative niche businesses in the local financial sector. They may still be small in terms of total assets and branch networks, but they are, by and large, well run and very profitable with sound balance sheets and solid capital bases.

There are at present nine commercial banks incorporated in the northern emirates of Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah and Fujairah. These banks had a combined asset base of just Dh109 billion at end-2009, which formed roughly 7 per cent of the total assets of all the commercial banks in the country.

Government role

Most of the nine were founded by local governments in conjunction with other investors from the UAE and overseas. It is worth noting that local governments have acted responsibly, and nearly all banks have limited exposures to the governments in their respective emirates of incorporation. But with limited opportunities in their home emirates, most of the banks tend to focus on Dubai and, increasingly, Abu Dhabi for new business.

The banks incorporated in Sharjah are Bank of Sharjah (BoS), Sharjah Islamic Bank (SIB), United Arab Bank (UAB) and Invest Bank (IB). National Bank of Ras Al Khaimah (RAK Bank) and Commercial Bank International (CBI) are both incorporated in Ras Al Khaimah. Fujairah and Umm Al Quwain have their own national banks, National Bank of Fujairah (NBF) and National Bank of Umm Al Quwain (NBQ). Ajman Bank was incorporated more recently, in 2008, in the emirate of Ajman.

Given their good financials and well-managed operations, some of these banks have attracted attention from foreign investors in recent times. A few foreign banks, keen on operating in the UAE and long denied a presence by the Central Bank, now view a strategic investment in these banks as a good way of establishing a toehold in the country.

Commercial Bank of Qatar has a 40 per cent stake in UAB, which it acquired in 2007 and 2008, while Qatar National Bank owns 16.5 per cent of CBI.

NBQ's decision to issue convertible bonds to Kuwaiti company Global Investment House was ill-fated owing to the latter's financial problems, but it arose from a conviction that new partners could provide some much-needed depth and competitive advantage to its business.

SIB's decision to give a 20 per cent stake to Kuwait Finance House coincided with its conversion into an Islamic bank. BoS is the only bank to aim for geographical diversification by acquiring a bank overseas (in Lebanon), in 2008.

A high level of customer concentration in the deposit base is a shortcoming of the banks in the northern emirates. This implies that a bank typically relies on a few individuals or entities (which could also include local governments) for a disproportionately large slice of their deposits. However this is a universal problem in the UAE, and has more to do with the fact that wealth is concentrated in the hands of a few.

Loyalty gained

While in theory this places the banks, particularly those with small networks and limited retail franchises, in a vulnerable position, particularly during a crisis, in reality the banks of the northern emirates have not experienced any major liquidity problems for many years. While there may be many reasons for this, I believe that these banks have earned the loyalty of their largest and most important customers by providing top-quality service.

For the most part, banks in the northern emirates have withstood the adverse impact of the global financial crisis reasonably well.

This was partly due to the support of the federal government and the UAE Central Bank, but more importantly it was because these banks had limited exposures to the areas that created the most problems for the UAE financial sector, such as loans to cross-border entities, the real estate sector in Dubai, US sub-prime derivatives, other international investments and unsecured retail credit, such as personal loans and credit card receivables.

However, bad loans did increase in 2009, and all banks had to book higher impairment provisions. RAK Bank is the only bank in the northern emirates with sizeable consumer loans, but to the bank's credit, its retail book had fewer problems than the portfolios of the larger banks in Dubai and Abu Dhabi, which is a testament to the bank's proactive credit policies.

Reasonable performance

An analysis of the results for the first nine months of 2010 showed that these smaller banks by and large performed reasonably well despite the continuing difficult domestic environment.

All banks remained well capitalised, and at least four banks (BoS, SIB, NBQ and UAB) had capital-to-total assets ratios of more than 20 per cent.

RAK Bank reported a substantial 37.5 per cent increase in net profit and an annualised return on average assets (ROAA) of an astounding 5.03 per cent on the back of good growth in credit and robust customer deposit collections.

NBF came back on track following prudent balance sheet management and a strong focus on its core business. The bank reported a sizeable 86.3 per cent rise in net profit, albeit from a low level, and an annualised ROAA of 1.43 per cent.

CBI's net profit rose by a substantial 120.7 per cent (also from a very low level in the previous year) owing to higher fees and commissions and reduced impairment provisions; its ROAA was an annualised 1.27 per cent.

UAB and IB reported relatively modest increases in net profit of 5.9 per cent and 4 per cent respectively, but both banks posted strong ROAAs, of 4.07 per cent and 3.17 per cent.

At BoS, net profit rose by a marginal 1.4 per cent owing to an increased emphasis on maintaining strong liquidity, a hallmark of this bank for several years, but ROAA remained high at 2.75 per cent.

SIB's net profit declined by 15.8 per cent in the first nine months of 2010, but its net profit for the full year rose by 2.4 per cent over 2009 and its ROAA was 1.63 per cent.

NBQ's net profit declined by 7.6 per cent in the first nine months of 2010 reflecting its conservative stance and its focus on balance sheet consolidation; but ROAA remained high at 2.96 per cent annualised.

Pending upturn

When the financial crisis hit the UAE, the banks in the northern emirates had to abandon their growth-oriented strategies and deal with increased bad loans and higher impairment provisions.

Banks have significantly beefed up their credit risk management, and over the past two years their focus was mainly on capital conservation and maintaining good liquidity.

With balance sheets substantially strengthened, these banks are poised to benefit from any upturn in the domestic economy. Barring any unforeseen developments, their future outlook looks favourable.


The writer is Senior Credit Analyst at Capital Intelligence Ltd.