Analysts and bankers expect more international banks with small retail operations in the UAE to sell off their local branches, as they look to consolidate operations in the region while faced with liquidity problems in their home markets.

Two UK banks with a small retail presence in the UAE have now sold off those operations to concentrate on other business lines. In June 2010, Abu Dhabi Commercial Bank (ADCB) bought the retail operations of Royal Bank of Scotland for $100m. ADCB is now understood to be frontrunner to buy the retail operations of Lloyds TSB Middle East, the local arm of Lloyds Banking Group.

As European banks struggle with liquidity issues due to the Eurozone debt crisis, more sell-offs are expected. “Many international banks had considered this a strong growth region, but with the regional slowdown and troubles in markets closer to home, we believe they are now looking at the scale of their operations here and reassessing whether it makes sense,” says Raj Madha, banking analyst at Rasmala.

During the later part of 2011, European banks, such as BNP Paribas and Credit Agricole, sold off large parts of their regional asset book in the secondary market as part of global asset disposal programmes intended to shore up their balance sheets.

“Although profitable, the amount of bad debts accumulated, [so] the regulatory restrictions on operating here and trying to recoup those debts makes a lot of small retail banks unviable,” says the head of one foreign bank in the UAE. “I expect to see more consolidation this year,” he adds.

Foreign banks are only allowed to open eight branches in the UAE, but with 28 foreign banks and 23 local banks, competition for the UAE’s nearly 8 million potential customers is fierce.

“There is a lot of pressure now to retrench to core markets,” says another senior banker at a European bank in the UAE. “It is very difficult to compete with the local banks in retail where they have a competitive advantage.”

Lloyds is understood to have been working on the potential sale, which has yet to be finalised, for about the past six months, during which time several potential suitors have expressed interest in the bank. In addition to problems in their home markets, many European banks have found themselves overexposed to debt-laden corporates in the region. Lloyds was one of the largest creditors to Dubai World when it called a debt standstill on $26bn of debts in November 2009.

The prospects of consolidation in the UAE banking sector have been raised several times over the past few years, but so far few deals have been done. In 2011, Dubai government-controlled Emirates NBD took over Dubai Bank, another state-controlled lender, as part of a rescue package for the bank which faced troubles over its exposure to Dubai state-owned companies.