The UK: The eighth emirate

23 November 2010

The City of London has been called by some ‘the eighth emirate’ and British financial institutions are playing a key role in helping to develop the UAE’s banking and finance sector to its full potential

Situated at the epicentre of vast regional trading blocs, the UAE’s financial services sector stands to gain from a revival in trade volumes and British financial institutions will be bidding hard to participate in the new business opportunities that will emerge.

But the City of London has its work cut out. In the increasingly competitive global marketplace its elite firms must prove their worth to a country that wants to sustain close ties to London but which will no longer grant them special status by virtue of their provenance.

UAE banking sector
Total assets ($bn)
Q4 2008396
Q1 2009397
Q2 2009405.5
Q3 2009414
Q4 2009413
Q1 2010417
Q2 2010418.5
Source: MEED; company results

The UAE’s financial sector has matured. It is home to 51 banks whose combined profits exceeded $4bn last year and whose total assets exceed $416bn. Liquidity rose by $7bn to $25.7bn over the previous year, which suggests a return to pre-crisis performance is under way. But there has been a heavy price to pay for the credit crisis. The UAE’s commercial banks expanded credit aggressively from 2004 to 2008 to fund large-scale projects. This generated $100bn of credit above the underlying growth, according to the International Monetary Fund. Capital buffers were not adequately maintained, forcing the authorities to step in with support amounting to $16bn. 

Stronger footing banking sector in the UAE

The operating environment remains difficult, with low economic growth and investment, weak demand for loans and investor confidence issues curtailing the banks’ ability to access low cost, wholesale funding. The aim now is to put the sector on a stronger footing and UAE authorities are working hard to create deeper financial markets.

Q4 2008271
Q1 2009269
Q2 2009273
Q3 2009277
Q4 2009276.5
Q1 2010277
Q2 2010279
Source: MEED

Dubai in particular has embarked on an audacious strategy to establish itself as a hub for institutional finance and capital and investment to the GCC, Middle East and North Africa. It has set up its own offshore market, the Dubai International Financial Centre (DIFC), offering investors and issuers of capital world-class regulations and standards. It aspires to compete with New York, London and Hong Kong. And, despite the economic downturn it has maintained the number of active registered companies operating from its free zone steady at 745. It has also succeeded in attracting the world’s biggest financial institutions. Sixteen of the world’s top 20 banks have established a presence at the DIFC, as have eight of the world’s largest asset managers and four out of five of the world’s largest insurers.

For blue chips, the DIFC presents a strong platform for regional expansion. “We domicile a very significant amount of our regional operations in the DIFC,” says Jeremy Parrish, head of Standard Chartered Bank in the UAE. “We’ve raised well over $12bn in funds in the year to date for GCC issuers in the bond market.”

UK financial institutions have been among the first to establish themselves in the DIFC.

“With the introduction of the new funds regime, which permits DIFC-based fund managers to manage funds in other jurisdictions, the centre will be even more attractive as an investment centre,” says Marwan Lutfi, head of business development at DIFC Authority.

Plans are afoot to add ballast to the DIFC with new insurance capacity and the development of a global centre for Islamic finance.

Bonds and sukuk in the UAE

Abu Dhabi is also looking to embellish its credentials as a leading regional financial hub. Under its Abu Dhabi 2030 Vision, Abu Dhabi sees enormous potential to expand the debt securities market, including bonds and sukuk. Equity investments have also grown.

Abu Dhabi Securities Exchange (ADX), established in 2000, has attracted a steadily increasing number of listed companies. British investors are prominent. In 2010 up to 8 July, the UK accounted for 20.75 per cent of the total trade, ranking first among foreign investors.

For HSBC the UAE’s position at the centre of a massive emerging economic growth area accentuates its appeal. “International capital is coming back to the region … in the expectation of future growth,” says Tim Harrison, HSBC’s communications director. HSBC sees the most significant growth in commercial banking associated with international trade, where it is seeing strong increases in volumes.

The City looks set to retain its close ties with the UAE and there is much to win. Leading UK asset managers are looking to secure mandates from the UAE’s sovereign wealth funds, which outsource their investment management.

“The City has a vast amount to offer, especially in vocational training but also in putting together complex transactions,” says Parrish. “But, whereas in the past we thought it would automatically come to us, that is not the case anymore.”

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