Dubai frequently attracts the most attention in the UAE, and in banking it is a similar story. Banks from emirates such as Sharjah and Ras al-Khaimah are often neglected in favour of their larger rivals in Abu Dhabi and Dubai.

With less exposure to defaulting corporates, banks in the northern emirates now have an opportunity to develop their market share. But they may find their opportunities to grow hampered by their exposure to real estate and their dependence on Dubai’s economic success.

The combined assets of the largest banks in the five northern emirates of Sharjah, Ras al-Kaimah, Fujairah, Umm al-Quwain and Ajman are worth some $17bn.

The biggest two are Bank of Sharjah and National Bank of Ras al-Kaimah (RAK Bank), which collectively have assets in excess of $9.8bn. By comparison, Emirates NBD, the biggest bank in Dubai, recently reported assets of just under $79bn, while the National Bank of Abu Dhabi controls $54bn in assets.

UAE northern emirate banks focus on retail

As of 31 March 2010, Bank of Sharjah held $5bn in assets. The first bank to be established in Sharjah and the fifth in the UAE, Bank of Sharjah is predominantly a corporate bank, with around 95 per cent of its revenue generated from non-retail sources, although it does also offer retail and investment banking services.

In terms of size, RAK Bank is its closest competitor within the northern emirates, but its focus differs considerably, being mainly retail banking, namely personal lending, credit cards and mortgages. Customer deposits accounted for 90 per cent of its non-equity funding in 2009. 

RAK Bank … is the most pure retail bank in the UAE, and still doing relatively well

Robert Thursfield, Fitch Ratings

Throughout the financial crisis, the balance sheets for both banks appear to have held up well. Bank of Sharjah’s assets grew from $3.4bn in March 2007 to $5bn at the end of March 2010. However the acquisition of BNP Paribas Group’s Lebanese operations in September 2008 accounted for a significant portion of this. Meanwhile, RAK Bank doubled its assets over the same period, growing its balance sheet from $2.4bn to just under $5bn at the end of the first quarter.

[Bank of Sharjah] tried to stick to what they know - they haven’t been tempted to expand in every direction

Robert Thursfield, Fitch Ratings

According to US ratings agency Fitch Ratings, the capitalisation of both banks is more than adequate. The Eligible Capital Ratio awarded to Bank of Sharjah by Fitch was a high 23.3 per cent, with RAK Bank rated at 19.1 per cent at the end of 2009. Under the terms set by the Central Bank of the UAE, banks’ reserve requirements are 14 per cent of current account deposits.

Net profits for UAE northern emirate banks

“They are interesting banks,” says Robert Thursfield, director, financial institutions, Fitch Ratings. “RAK Bank is very much a retail bank … they’re the most pure retail bank in the UAE, and still doing relatively well. A lot of their business is from Dubai, but also the other emirates. Their reported numbers are quite good, and they don’t seem to have suffered from skips [debt defaults].

“It is difficult to believe, but they are charging quite high rates on products, so they do expect higher impairments [with future business], but not as high as they could have feared,” he adds.

Even amid the difficult economic climate, RAK Bank posted net profits of AED726.2m ($197.7m) for 2009, a rise of 14 per cent from AED635.9m the year before.

The bank reported a deterioration in some of its retail segments during the first quarter of 2009, especially in its credit card business due to the wave of redundancies in the country, which resulted in some customers leaving without settling their debts.

Despite these challenges the company has not looked to change its core business, which remains retail banking.

Bank of Sharjah, meanwhile, recorded net profits of AED475m for 2009, up 16 per cent from AED410m in 2008. The bank attributed its ability to weather the downturn on the conservative credit, liquidity and investment policies that it has always tried to adhere to.

Thursfield says Bank of Sharjah has an almost entrepreneurial approach, with a small but well-qualified management team. “They have tried to stick to what they know – these guys haven’t been tempted to expand in every direction,” he says.

UAE banks lending growth

The other major banks of the northern emirates, in order of assets as at 30 March 2010, are National Bank of Umm al-Quwain, National Bank of Fujairah and Ajman Bank. Assets for the period were reported as $3.5bn, $3.2bn and $600m respectively.

Regionally, the UAE banking sector had the highest levels of non-performing loans (NPLs) in 2009, up 165 per cent on 2008. Banks across the country have responded by increasing their provisioning, indicated in their financial reports as impairment charges. RAK Bank’s impairment provisioning more than tripled between 2008 and 2009, climbing to $68.5m in 2009 from $19.2m in 2008.

However, Bank of Sharjah’s impairment provisioning over the same period declined. It fell to $24.4m in 2009, from $42.7m in 2008, which then gave rise to a corresponding jump in profits from the previous year.

According to Michael Small, a partner at VMS Consultancy and former credit analyst with the US’ JP Morgan, this was an unusual move for a bank to make, particularly amid a property crash and high levels of loan defaults.

“There are more than 50 per cent more loans on their books in 2009 (even taking into account the effect of a purchase made just before year end), and yet a far lower general impairment charge. It appears that they’ve assumed in this far more troubled market that they would have less NPLs, and this is somewhat surprising, especially given the exponential loan growth in the previous year,” he says.

During the same period from 2008 to 2009, Bank of Sharjah’s loans and advances grew from $2.8bn to $4.9bn. However, $435.7m of this growth came from the acquisition. The growth of loans and advances between December 2007 and December 2008 was 52 per cent. In the period before the financial crisis hit, Bank of Sharjah’s loan book was $1.4bn, with $2.3m in impairment provisioning.

Of the four northern emirates banks that have produced impairment figures for 2008-2009 (Ajman bank was only inaugurated in February 2009), all have shown increases in impairment provisioning, except Bank of Sharjah.

“Are they being cautious enough in the provisioning? Are they truly recognising the amount of provisions that there should be, given the asset growth that took place over the last nine to 12 months of an exponential property boom?” asks Small.

During the property boom in the UAE, which was particularly concentrated in Dubai, there was rapid growth in lending across the UAE’s banks.

It is difficult to ascertain whether bank loan figures are related to real estate, either directly or through lending to companies with significant property interests. However, it is clear that lending figures across many banks of the UAE spiked during the height of the property boom.

At Bank of Sharjah, loan figures between September 2007 and September 2008 grew 82 per cent from $1.4bn to $2.8bn. Even allowing for the bank’s purchase of the Lebanese operations of BNP Paribas, which added 30 per cent of fully reserved loans to the overall book – this 50 per cent growth in lending and advances is significant.

“There’s an exponential growth on the balance sheet at that time, and that’s the time of the property boom. Unless someone can come up with a better explanation as to why that number doesn’t reflect property loans,” says Small. “With that growth in loans and advances, if they’re not particularly involved in property, I would be staggered.”

Challenging times for UAE banks

By comparison, RAK Bank’s figure for lending and advances grew at a more restrained rate, from $2.4bn in March 2008 to $3.9bn in March 2009, falling slightly to $3.6bn at the end of the same year. This reflects the bank’s focus on retail lending rather than corporate lending, which distinguishes it from other UAE banks.

The banking sector of the UAE has faced significant challenges in the past two years, and continues to face difficulties, particularly with the ongoing slump in the Dubai property market and the heightened levels of debt defaults and NPLs this has brought. The banks in the northern emirates have recorded continued asset growth despite this negative environment. 

At present, the banks are well positioned to emerge from the crisis, but it still remains to be seen whether NPLs have peaked. Fears that a double-dip recession could prompt a further wave of redundancies in the UAE darken the outlook for the banking sector.

With the northern emirates banks intertwined with the fate of Dubai in particular, the impact of further redundancies would certainly make itself felt on the banks headquartered there. The outlook is positive, but caution is still advisable.