Saudi bank predicts UAE bank mergers

BANK MERGERS: Some of the UAE's domestic banks, like Dubai Bank, may have to merge. (For artistic purposes only)

UAE bank mergers look to be increasingly likely this year if the the sector is to survive the current global economic storm, regional economists said on Monday.

Economists from a prominent Saudi bank have warned that a steep fall in UAE bank profits in the fourth quarter of last year, plus concerns about asset quality, lending curbs, poor loan to deposit ratios and tight global credit controls, will slow bank credit growth further this year.

In such a climate, the report by Saudi American Bank (Samba) said, mergers would be necessary, and further cash injections by the UAE government may be needed to stop the slowdown, reported UAE daily Emirates Business.

"Given the tough outlook, further such support may be necessary, and there may also be scope for consolidation in the banking sector. Currently there are more than 50 domestic and international banks, many of them government controlled," it said.

The warning is inline with recent comments made by UAE Central Bank governor Sultan bin Nassir Al Suwaidi, who has urged the country's 24 national banks and 28 foreign units to consider merger.

Suwaidi said the Central Bank would continue to encourage mergers as a means to create strong financial entities and face possible fallouts of the global crisis.

"The UAE banking sector has had a successful experience in mergers when some banks united during the bad debt crisis in the 1980s," added an economist at an Abu Dhabi Bank, who wished to remain anonymous.

"I think it is the right time now to consider more mergers in the sector and I feel there will be such moves this year or next year," he added.

The Samba report predicts that banks would also face a tougher time in 2009 in the face of lower oil prices, weak stock markets, falling real estate prices, reduced access to capital markets, and the broad economic slowdown.

Reflecting the deteriorated operating conditions, international rating agencies have recently moved to downgrade the individual ratings of a number of UAE banks, although the Long-Term Issuer Default ratings are unlikely to change as they remain driven by the probability of support by the federal government.

IUAE banks were now  offering higher interest rates to attract more deposits after a steady growth in their deposit-to-loan gap, the report added.

"UAE banks are now offering up to seven per cent on time deposits compared with two per cent a few months ago, as they try to boost their deposit base,” Samba said.

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READERS' COMMENTS

UAE banks would benefit from a rationalization of the offer
Posted by Tristan de Ferluc, Abu Dhabi, UAE on Wednesday 4 March 2009 at 16:33 UAE time


What does it mean ?

Theoretically, the banking sector, excluding specialized financing companies, would need a conventional and an islamic product offer to satisfy all customers needs (individuals, small businesses, corporates and governments). Taking into consideration the specific structure of the UAE, each emirate needs to have its own window, at least one offer whether conventional or islamic. On top, to guarantee a healthy competitive market, you need a few companies in each category, especially in the biggest emirates. If we consider the 5 smaller emirates could do with a maximum of one conventional and/or one islamic and the bigger emirates with two in each category, the global figure would come down to a maximum of 15 local companies, the foreign companies contributing to maintain pressure on competitiveness of the market.

Looking at the current UAE market structure, it appears there are some big local players but no specific leader, the big players being mainly controlled by governments.

A rationalization of the offer would consist of reducing the number of companies, especially those having the same key shareholders, by merging them to get players with :

• bigger customer base: good to tap liquidity and save on funding costs, good to dilute the weight of unitary risks

• bigger size: good to decrease funding costs through better rating, increase funding power to finance bigger projects and improve own efficiency and profitability and as a consequence, a better return to shareholders

The UAE market would give birth to a limited number of stronger players, able to develop further in the Middle-East and able to compete more efficiently with international players.

In the present difficult context, it seems to be the right time to perform this first step before participating later on to an inevitable middle-east banking consolidation.

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