The UAE banking sector can look back on a memorable year in 1994. The market is fiercely competitive but that is no barrier to bumper profits. As banks around the region were hit by the effects of soft oil prices and the turmoil in the global bond and equities markets, several banks in the UAE turned in their best performance for a decade. They had the buoyancy of local construction, services and trade to thank for the fact that the 11 banks quoted on the unofficial UAE stock exchange managed to increase average net profits by 16 per cent while total assets grew by almost 5 per cent (see table).

But last year will prove a hard act to follow. A slowdown in economic activity is already apparent as government departments and ministries cut back on expenditure. Competition for new customer business is becoming ever more intense and this puts intense pressure on the banks to woo customers with innovative products and high quality services.

Banks are having to adapt to the onset of more demanding regulations as well. At the end of December all 19 local and 28 foreign institutions will be subject to a new central bank rule which limits loans to an individual or group of related borrowers to 7 per cent of a bank's capital base. The ruling, first announced in October 1993, has already been redefined once by the central bank, after a hostile response from the banking community, and further amendments and clarifications are expected over the coming months (UAE Banking, MEED Special Report, 5:8:94). Several smaller local banks, including Dubai Islamic Bank, National Bank of Fujairah and Bank of Sharjah, have taken the opportunity to increase their capital.

All but three of the local banks that have announced results managed to increase earnings in 1994. One of the exceptions was Arab Bank for Investment & Foreign Trade (Arbift), which saw net profits drop by 18 per cent to $29.7 million. But total assets rose by 16 per cent, a significant turn-around on the 1993 performance, when the bank lost more than half of its assets after the US Treasury Department's Office of Foreign Assets Control (OFAC) designated Arbift a 'national of Libya'.

Elsewhere, a wide variety of factors contributed to higher profitability. National Bank of Abu Dhabi (NBAD), regaining its position as the largest local institution in asset terms, reported some of the most striking results with a 12 per cent rise in earnings. Customer deposits rose by 20 per cent and loan volumes increased by a staggering 82 per cent to $4,763 million, largely as a result of a surge in lending to public sector institutions. This reflected the impact of a decision by the Abu Dhabi finance department to oblige government agencies to finance their capital projects through borrowing rather than cash flow.

At Abu Dhabi Commercial Bank (ADCB), customer deposits and loans both fell but did little to dent net earnings, which rose by 33 per cent. The rise was attributed to a 38 per cent increase in investment trading and a doubling in income from investments and securities' dealing to $14.4 million.

Banks based in the trading hub of Dubai also managed to post higher earnings. The National Bank of Dubai reported a 4 per cent increase in net earnings, despite the loss of a single private deposit worth $680 million, which ate into assets and customer deposits. At MashreqBank a 50 per cent increase in interest income and a 28 per cent jump in interbank lending fuelled a 20 per cent jump in profits. The profits were the highest of the UAE- based banks and appeared to validate the decision to begin an extensive upgrade programme two years ago.

In Sharjah, three out of the four local banks have continued the process of rebuilding, following the 1992 debt rescheduling programme. The activities of the fourth, National Bank of Sharjah, remain handicapped by the failure to produce a balance sheet for the past five years. The Bank of Sharjah, United Arab Bank and Investment Bank for Trade & Finance (Investbank) have all performed better over the past two years and the pressure to merge from the central bank seems to have eased. At Bank of Sharjah profits grew by 25 per cent in 1994 on the back of a 12 per cent rise in commission and other income, while assets increased by 3 per cent to $238 million.

Impressive

Elsewhere, National Bank of Ras al-Khaimah recorded an impressive 36 per cent rise in net earnings to $11.7 million, on the back of an improvement in interest income and lower provisions. National Bank of Fujairah went one better to achieve a 50 per cent surge in profits to $9.9 million.

The goal for all banks in 1995 is to better last year's performance. It will not be an easy undertaking. 'Every year the banking sector becomes more competitive,' says Sulaiman Hamid al-Mazroui, chief manager for marketing at Emirates Bank International (EBI). 'There is always the pressure to improve quality of service and introduce more advanced technology to meet the ever increasing demands of more sophisticated customers.'

A multitude of new products and services has been launched into the retail market over the past two years. EBI has a direct and interest-free car finance scheme and a sharing agreement for automatic teller machines (ATMs) with British Bank of the Middle East (BBME) and Bank of Bahrain & Kuwait. Standard Chartered Bank brought in night banking and a new loan scheme tailored exclusively for UAE nationals. MashreqBank unveiled what it calls a 'packaged bank account', known as the MashreqChoice bank account, which the bank claims as the first of its kind in the UAE.

To some bankers, the flurry of product innovation will soon reveal its limitations, especially as it is happening in a market with only 2.4 million potential customers. 'Everyone is moving aggressively into consumer and retail financing,' says a foreign banker based in Dubai. 'At the end of the day, how many cars and televisions can you have? There is a lot of debt building up and this is in a market where bad debts have not been a significant factor over the past couple of years....The sheer number of banks and the intensity of the competition means that some rationalisation is inevitable.'

The more dynamic local banks still see scope for expanding their corporate activities. In late March, EBI pulled off a notable coup when it became the first non-Saudi bank in over a decade to win a mandate for a publicly syndicated loan for a Saudi Arabian corporate entity. The award was for Petromin Lubricating Oil Refining Company and involves arranging a $120 million loan.

International banks are also stepping up their activities in the corporate sector, often with a view to pursuing new financing opportunities elsewhere in the region. Over the past year, three banks - Merrill Lynch, Dresdner Bank and Bank of America - have opened representative offices in Dubai, confirming the city's growing status as a regional financial centre.

The creation of a formal stock exchange would enhance the UAE's appeal further and provide new opportunities for local and overseas financial institutions. The central bank is studying the proposal with the help of Canadian experts but has given no indication of when a decision will be forthcoming. There is official interest in privatisation and a properly regulated exchange would be a prerequisite for a formal programme of state sell-offs. This year has already seen the flotation of Dubai Investments, a new joint stock company set up to establish and acquire interests in a wide range of economic activities. In Abu Dhabi, the General Industry Corporation unveiled plans in early April to offer five of its plants for sale on the informal stock exchange by the end of 1995. There could be more to come. The one certainty is that there are plenty of local banks that would be happy to handle the new business.

AH