Big bank theory

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As an institution that markets itself as ‘The number one bank', it might be expected that National Bank of Abu Dhabi (NBAD), for years the largest bank in the UAE by assets, might feel threatened by the merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD). Industry observers have predicted that NBAD could join forces with Abu Dhabi Commercial Bank (ADCB), the emirate's second largest lender, or even with Abu Dhabi Islamic Bank, in order to regain its title.

Michael H. Tomalin, chief executive of NBAD, will not be drawn on merger speculation, but says that the bank is confident it can continue to compete as a standalone entity.

"Number one doesn't necessarily mean size," he says. "It could be number one in terms of customer service, business excellence, international network, profit or rate of profitability.

"We acknowledge that with the merger of the two banks in Dubai we will not be the largest bank in the country in terms of size. Actually, in terms of capital we haven't been the largest bank in the country for quite a long time, but we hope that we will retain our number one position in various other dimensions and we shall work hard to do that."

Tomalin says it is important that the UAE grows bigger banks, citing the case of Singapore, which has a smaller economy than the UAE but much larger banks, having already gone through a process of consolidation.

He points out that the number of banks in the UAE is likely to increase, rather than decrease, in the coming years, with the establishment of two new Islamic banks, Noor and Al Hilal, and the probable entry of more foreign banks. Tomalin has no problem with the number of banks in operation, since most of them are generating strong profits, but says that size is crucial in the long term.

"The top three banks have something like a 30% market share and the top five banks have something like a 45% market share," he says. "That is unusual. If you take the top three banks in France, Singapore, Malaysia, Hong Kong, or Australia, you'll find they have much bigger market shares and therefore much more dominant positions in their own markets."

He adds: "The economies of scale that produces for them, in terms of their ability to exercise their muscles around the region they inhabit or around the world, are much greater. I think it's not the number of participants that is the issue, so much as the size of the largest banks in that particular pool and their relative undersize relative to the importance of the UAE economy today."

Tomalin also believes that overseas institutions account for far more of the UAE's banking activity than statistics might suggest.

"In the domestic marketplace, the foreign bank market share is running at round about one-quarter but that understates the size and dominance of the foreign banks in our very open economy," Tomalin says. "In fact, they represent a much bigger share of the market than the quarter that appears in the national statistics because for so much of the business that they do, the revenue and the assets are booked not in the UAE but somewhere else."

He cites project finance, asset management, private banking, corporate finance and corporate advisory work as areas of banking that are dominated by foreign banks in this region.

"For example, private banking. There are estimated to be very large sums of money routed from this part of the world and the Gulf generally sitting in banks in Switzerland and London. I would guess that the market share that local banks have of that is probably less than half of 1%," Tomalin says. "So we have a situation in the UAE where the foreign banks are very large and growing very fast, and the local banks are relatively small in a very crowded market place.

"We've seen in other markets where this happens, it's not good news for local banks. You can see in the Baltic, the Balkans, parts of Latin America, that local banks have been marginalised away almost altogether. I don't think that's going to happen here, but that's one of the reasons why I welcome the merger of NBD and EBI."

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