Growing headwinds for UAE banks, but merger talks give hope

UAE banks appear to have the GCC’s highest exposure to European trade, investment and bank deposits, according to the Egyptian investment bank EFG Hermes.

Shares in NBAD had so far gained 15.5 per cent this year. Ahmed Jadallah / Reuters
Powered by automated translation

UAE banks will have their work cut out for them in the second half of the year as the obstacles to growth increase.

For the past two years, lenders have held their own well, staving off the side effects of lower oil prices. That has included a drop in lending to small and medium-sized businesses as well as a diminishing demand for debt and other financial services.

To boot, the banks have been contending with lower margins because of a long period of record-low interest rates since the financial crisis. That means the profit they make on giving out loans is razor thin.

Now, they will also have to deal with the decision by Britain to exit the European Union. The consequences could include a bigger slowdown in global economic growth and could keep a lid on both oil prices as demand withers and US interest rates if the Federal Reserve decides that global outlook is too murky to raise them.

UAE banks also appear to have the GCC’s highest exposure to European trade, investment and bank deposits, according to the Egyptian investment bank EFG Hermes. The “UAE appears relatively more exposed to Brexit via trade, real estimate investment and tourist flows from the UK”, analysts led by Murad Ansari wrote. “Among UAE banks, NBAD appears most exposed with about 20 per cent of its deposits emanating from Europe.”

Still, most analysts agree that it is too early to tell how the UAE will be affected as global economic and financial policymakers are largely yet to respond to the Brexit decision.

It’s not all doom and gloom for UAE banks, though, and the announcement earlier in the month that National Bank of Abu Dhabi and its biggest rival in the emirate, FGB, were in merger talks, has given some reason to be optimistic.

A merger between the banks would create the Middle East’s biggest lender and one that is strong in corporate and retail banking, analysts said.

It’s a combination that would also help improve profitability in a crowded industry, especially at a time when lower oil prices are hampering growth prospects.

The combined bank would hold assets of Dh627 billion. Qatar National Bank is currently the region’s biggest lender, with total assets at the end of March of 550bn Qatari riyals (Dh554.83bn).

More than 50 banks and financial institutions serve 9 million customers in the UAE, making it one of the most crowded banking markets in the region. A combination of NBAD and FGB would be the biggest banking merger in the UAE since Emirates Bank International and the National Bank of Dubai joined in 2007 to create Emirates NBD.

Many in the banking sector have long urged consolidation in the industry to make it more efficient and profitable.

“We believe consolidation would be positive for UAE banks,” said Waleed Mohsin, a Dubai-based analyst at Goldman Sachs. “This is especially true given the fragmented nature of the market and the current challenging macro environment.”

Investors have been bullish on NBAD shares since the talks of the merger. Those gains have outpaced the performance of bank shares as a whole as well as country’s two main benchmark stock indexes.

Shares of NBAD had gained 15.5 per cent this year, up until yesterday, versus a 2.4 per cent drop in Standard & Poor’s UAE Bank index.

Dubai’s benchmark has increased by 4.2 per cent so far this year and Abu Dhabi’s is up by 2.3 per cent.

Follow The National's Business section on Twitter