Until the merger of Emirates Banking Group and the National Bank of Dubai to form Emirates NBD, National Bank of Abu Dhabi (NBAD) was the largest bank in the UAE. Now relegated to second place, NBAD will have to work hard if it is to regain its top spot in the UAE banking sector. But the bank is well placed to lead the way in creating an international Arab banking brand.

Its former status as the emirate’s central bank gives it significant leverage throughout the country, although the fiercely competitive UAE banking sector means that its future position in the market could depend on its appetite to complete acquisitions of its rivals.

Structure

NBAD is restructuring the bank into 13 separate business lines in a bid to help it drive profit growth in the increasingly competitive UAE banking market.

Key to these changes is the separation of formerly unified parts of the bank, such as retail and private banking, and the corporate and small and medium enterprise (SME) banking business. This will create separate cost centres for the retail banking division, SME business, private banking and corporate banking divisions. Each has now been given its own profit targets.

The bank’s ownership is split, with 27 per cent of its shares floated on the Abu Dhabi Securities Market: 24 per cent held by domestic investors, 3 per cent by foreign institutions, and the remaining 73 per cent being held by The Investment Council, which acts as the domestic investment arm of the Abu Dhabi government.

The bank’s board largely comprises UAE government personnel. As a result, concerns have been raised by analysts that it cannot independently regulate its activities, particularly as the government is the bank’s largest debtor. About 67 per cent of the bank’s loans are to the government, quasi-government organisations or corporate partners. However, some of the key positions on the management board are held by experienced international bankers, who are highly regarded in the industry.

Operations

Until 1978, NBAD was the UAE central bank and it has maintained a strong relationship with the government, which gives it privileged access to government-related business. It holds an 11 per cent market share of the UAE banking system and, despite mounting competition, is expected to be able to maintain its position as one of the dominant banks in the country. A recently launched drive to expand the bank’s retail presence will boost its efforts.

NBAD is one of the UAE’s most geographically diverse banks, with its international division accounting for nearly 20 per cent of total assets and 16 per cent of total profits after tax.

The concentration of lending to the government and corporates means NBAD has a net interest margin of 2.5 per cent, which is lower than the UAE average of close to 3.5 per cent. The bank’s operations are primarily split between four business segments: domestic, international and investment banking, and head office support.

Ambitions

NBAD has ambitions to be the number one Arab bank. However, since the launch of Emirates NBD established a larger bank just a few miles away in Dubai, chief executive Michael Tomalin has since taken a slightly softer line, saying that ‘number one’ could be in terms of asset size, customer service, international network or profitability.

He admits that to achieve this the bank must grow, although the current strategy is to grow organically rather than through acquisitions. But competition within the UAE banking sector is intense. It has the highest number of banks per capita in the GCC, and is now the biggest banking sector in the region.

As part of the internal restructuring, the bank has appointed a new head of the retail banking division, John Malouf, who is charged with raising the contribution of NBAD’s retail banking activities from 20 per cent of total profits. The hope is that by building its presence in the relatively stable retail market, it can reduce some of the cyclical profit implications of relying heavily on government and corporate spending.

The bank is also keen to diversify its investor base through the issuance of debt to inter-national investors, although the current upswing in bond margins has temporarily halted this process. This should help the business to shift away from its reliance on a small number of big ticket depositors, the top two of which supply 20 per cent of the bank’s total deposits for funding.

MEED assessment

The key to NBAD’s growth will be how vigorously it pursues merger opportunities. If other banks are prepared to pay the high cost of buyouts, they may steal the advantage. Speculation remains over the likelihood of NBAD merging with Abu Dhabi Commercial Bank.

However, the more NBAD drives expansion of its newly restructured retail division, the fewer benefits will be gained from a merger. This is because one of the motivations of uniting the two would be to give NBAD access to Commercial Bank’s more developed retail arm.

If the Abu Dhabi government decides that NBAD should merge with ADCB, then it will undoubtedly go ahead. But at this stage, the two rival chief executives officers are in no rush to see this occur, favouring expanding their own institutions independently instead.

MEED expects the management team to focus their efforts on an aggressive expansion of the branch network in the UAE and geographic diversification to bolster already established operations regionally in Egypt, Oman, Sudan, Kuwait and Bahrain, and internationally in the UK, the US, France and Switzerland. The Far East will also be a target for expansion to allow the bank to tap into the significant interest the region has in the Middle East.