The UAE banking sector enjoyed another record-breaking 12 months in 1996. With already high liquidity levels boosted further by the unexpected oil price rise, all but a handful of banks reported significant increases in profits. And the strong performance is set to continue through 1997, as institutions seek to make the most of a stable economic outlook.

Last year’s results have provided further evidence that despite the presence of 47 banks serving a population of just 2.4 million, there is still enough business to go around. Bankers acknowledge that competition remains fierce in the traditional sectors of retail and trade. However, many have been reassured by the gradual emergence of new business opportunities, relating to the financing of industrial ventures and the management of new share flotations.

The 9 per cent increase in nominal gross domestic product (GDP) was reflected in an expansion of bank lending. The latest figures from the Central Bank of the UAE show that by the end of last September, the total assets of commercial banks had reached AED 186,160 million, up from AED 180,892 million at the start of the year. The increase was almost entirely due to stronger private sector credit demand, which rose to AED 77,229 million from AED 71,385 million over the period.

With Abu Dhabi benefiting from the bull run on the oil markets and Dubai and Sharjah seeing higher trade flows, banks throughout the federation saw growth in their balance sheets. At National Bank of Abu Dhabi (NBAD), the largest local bank in terms of assets, profits climbed by 46 per cent to AED 314 million, as a result of higher non-interest income and a substantial cut in provisions. The Dubai-based Emirates Bank International (EBI) group overtook National Bank of Dubai as the UAE’s most profitable institution, following a 20 per cent increase in net earnings to AED 382 million. For the first time in its 12-year history, Abu Dhabi Commercial Bank (ADCB) declared a dividend, while an 8 per cent increase in provisions and other expenses to AED 210 million failed to dent MashreqBank’s profits, which rose by 8 per cent to AED 350 million.

In Sharjah, all four local banks turned in healthy performances in a further sign that public finances and the economy are in the best shape for a decade. Foreign banks also fared well, despite the Sharjah government’s decision to fall into line with other emirates and levy a 20 per cent tax on their profits.

Elsewhere, National Bank of Fujairah recorded a 20 per cent increase in net profits. In February, it became the first local bank to secure a syndicated loan for internal funding purposes, when it received a $60 million, three-year term facility, arranged by Commerzbank. The federation’s smallest bank in terms of assets, the Commercial Bank International (CBI), had the notable distinction of seeing the highest profit increase, with net earnings rising three-fold to AED 45 million.

CBI’s neighbour, the National Bank of Ras al-Khaimah (NBRAK) was the one local institution to record a profit fall. The 48 per cent decline was brought about by a large increase in provisions to AED 18.7 million from the previous AED 131,000, as a result of a thorough credit review carried out by a new management team.

Only two of the UAE’s 19 local banks have still to issue their full-year results. Union National Bank (UNB) is expected to release 12-month figures in mid-1997. The bank has already published accounts for the five and a half years up to last June, in the first audited financial statement since the closure in most international centres of its former shareholder Bank of Credit & Commerce International (BCCI) in July 1991. The report showed that assets had remained largely unchanged and that a net profit of AED 75 million had been registered over the period. As for the Ajman- based First Gulf Bank, it has not published a balance sheet for either 1995 or 1996.

Bumper year

The bumper year has left bankers in an upbeat mood, although some still have lingering doubts about the strategies being adopted by certain institutions. ‘The sector is doing very well at the moment. But what concerns me is that a number of banks are not making the most of the good times to build up their reserves and are instead getting caught up in the race to be either the biggest or most profitable,’ says a senior banker in Abu Dhabi. ‘In future, it will be the depth of reserves that will be the critical factor.’

Credit risk analysis has also come under increased scrutiny. In the first quarter of this year, three incidents came to light involving expatriate traders and manufacturers absconding from the UAE, leaving behind substantial debts.

The sums, estimated at about $100 million, have been easily absorbed by the market, the high-profile cases have served to re-ignite the debate about the merits of the liberal lending policies being pursued by some banks. ‘As far as I am concerned, the whole affair is symptomatic of the intense competition in that area,’ says one foreign banker. ‘The worry is that if such things are happening when the going is good, what will happen when there is a downturn?’ The central bank has reacted by informally advising institutions to pursue a conservative lending policy, but has refrained from setting down new lending regulations.

Several foreign banks have already retreated from the lower reaches of the retail market, by setting a minimum balance of about AED 15,000 for account holders. In the light of recent events, some are now looking to limit their lending to the traditional trading sectors of textiles, electronics and building materials, and concentrate instead on developing portfolios in the industrial market.

With greater emphasis being placed on the expansion of the industrial base, demand for debt financing facilities is growing. Much of the interest is generating from the host of new projects planned in the downstream oil and gas industry. The Dubai-based EBI is acting as lead arranger for a $55 million loan to support the Van Ommeren tank terminal project in Fujairah. In Jebel Ali, at least two schemes are expected to require some commercial borrowing. These are the estimated $200 million condensate processing plant planned by Emirates National Oil Company (ENOC) and the $160 million fertiliser complex proposed by India’s Southern Petrochemical Industries Company (SPIC).

The borrowings on both schemes are likely to be dwarfed by the needs of the $900 million Ruwais polyethylene project, under development by Abu Dhabi National Oil Company (ADNOC) and the Copenhagen-based Borealis. Local bankers say four Abu Dhabi institutions – ADCB, NBD, UNB and Abu Dhabi Investment Company – will be invited to bid for the mandate. The successful bank will begin structuring the financing package.

Given its financial resources, ADNOC may appear an unlikely player in the debt financing market. However, it has sought commercial financing on at least three previous occasions in support of projects being executed by itself and its subsidiaries. Moreover, the state-owned company is assured a warm response. ‘People will fall over themselves to be involved in that deal,’ one foreign banker in the capital explains. ‘For Abu Dhabi, the move is logical. Loan pricing in the Middle East has been dropping over the past two years and ADNOC will be able to get some very competitive terms. It will also provide some scope for the government, at a time of sliding oil prices, to build up its reserves.’

Stock exchange

In anticipation of the long-awaited establishment of the official stock exchange, a number of banks have also been building up their equity-related activities. EBI has launched the UAE’s first mutual fund and a new stock market index. Both UNB and National Bank of Dubai have gained some useful experience from handling the highly successful Emaar Properties issue. More flotations are expected over the coming six months, particularly in Abu Dhabi. A new joint-stock real estate company is taking shape in the capital. Public share offerings are planned in the $3,000 million Saadiyat island development and the proposed Abu Dhabi Islamic bank.

Despite investor appetite for such ventures, there is still little indication as to when the formal exchange will begin operations. The latest prediction is that it will not materialise before next year. Central bank governor Sultan Nasser al-Suwaidi has remained tight-lipped on the matter, although he did say in March that he was in favour of an independent regulatory body being set up to monitor share activity.

The central bank has maintained a careful watch over the banking system during the past 12 months, but has issued few new instructions. With the sector functioning smoothly, it has concentrated on fine tuning the operating environment, rather than on wholesale reform. As part of the process, the central bank is looking to introduce international accounting standards (IAS) for all institutions. Several banks, including UNB and NBRAK, are already following the IAS, in an effort to provide greater transparency in accounting policies and disclosure. And its introduction as a legal requirement is viewed as a necessary step in the sector’s development. ‘Today, the inter-dependency of the global banking system is great,’ says a local general manager.

‘IAS is needed for credibility. It will also assist in ensuring the sector’s future wellbeing.’