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UAE needs bigger but fewer banks, says expert

Emirates NBD was the first bank merger to occur, in 2007 Creative Commons
Emirates NBD was the first bank merger to occur, in 2007

The United Arab Emirates (UAE) has too many banks and the sector needs to see more consolidation, especially as profits are squeezed and costs continue to rise, an industry expert told AGBI today.

“I think it would be helpful to have fewer banks [in the UAE]. I have been an advocate of that,” Asad Ahmed, managing director and head of Middle East financial services at global firm Alvarez and Marsal, said, adding that a smaller pool of lenders would be better economically for the country going forward.

“I think that to fulfil any large-scale economic agenda that the government may have, larger financial institutions are better enablers because they have deeper ability to underwrite growth,” he added. 

Ahmed is the author of A&M’s latest UAE Banking Pulse quarterly report for the first quarter of 2022. His report concluded that, in general, the profitability of the top ten largest listed banks in the country has deteriorated marginally in the last quarter.

The report found that net profit for UAE banks during the quarter was, on paper, up 24.3 percent quarter-on-quarter. However, when you remove the AED 2.8 billion ($760 million) gain made by First Abu Dhabi Bank (FAB) from its sale of a 60 percent stake in payment provider Magnati, the overall aggregate net profit for the top ten banks actually decreased by 2.6 percent quarter-on-quarter.

The UAE has a large pool of banks and is home to nearly 48 local and international lenders, serving less than ten million people.

The country has already seen some major mergers, starting in 2007 with the combining of Emirates Bank and the National Bank of Dubai to form Emirates NBD, and the recent creation of FAB from the merger of National Bank of Abu Dhabi and First Gulf Bank in 2017.

In 2019, up to six mergers and acquisitions in the sector were reported to be underway, with one of the most successful being the merger of Abu Dhabi Commercial Bank with Union National Bank in May 2019. The new entity later merged with Al Hilal Bank to create the third largest lender in the UAE.

Ahmed said such deals have a positive impact on the overall strength of the UAE banking sector. “Larger institutions also provide much more strengthening of the regulatory framework and of the economic pillars than a number of smaller institutions,” he believed.

A new capital rule announced by the UAE Central Bank last year, due to be implemented by the end of 2023, requiring local lenders to have a minimum of AED2 billion of paid-up capital on their books, will also have an impact, according to a report by S&P Global.

“We consider that the increase in minimum paid-up capital by the UAE Central Bank is adding another layer of pressure on banks to build scale and to continue the consolidation trend of the past years,” Aurelien Vincent, a partner at Strategy&, part of PwC, was quoted as saying in the report.

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