By Courtney Trenwith
Large Western banks have been selling off their local assets and retreating home, helping highly liquid local institutions deepen their roots even further. But as lower oil revenues make their impact, there are warnings even home-grown banks will soon have to take a closer look at their operations
Going, going, gone. First it was the Royal Bank of Scotland, then Lloyds, Barclays and Standard Chartered.
Foreign banks have been increasingly pulling out or trimming down their services in the UAE, leaving open opportunities that have been eagerly snapped up by prominent local banks.
But why? And what impact has it had on the market?
According to most analysts, it has been a matter of pull, not push, factors. Foreign banks are re-focusing towards their home headquarters and reeling in their offshore operations globally. The UAE is not the only market they have quit but the competition from highly liquid local banks has not made life easy for them.
“Foreign-owned banks have found it difficult to compete with the large, state-owned banks [in the UAE]. This has been the major driver of foreign-owned banks’ decisions to pull out of the retail sector and focus on more profitable corporate and investment segments, where they can be more competitive with the larger locally-owned banks,” the Middle East and North Africa banking risk economist for US-based consultancy IHS, Alyssa Grzelak, says.
“The UAE has a very competitive banking sector, particularly on the retail side, so it’s difficult for foreign-owned banks to gain a foothold and market share in the UAE.
“Leading up to the global financial crisis, the trend amongst large, Western banks, was to expand into as many emerging markets as possible. Post the crisis, we’ve seen a shift — [they’re] pulling out of a lot of markets where their subsidiaries or branches haven’t been profitable and they’re focusing on core markets where they’ve been able to gain a foothold and garner substantial profits.”
The domino effect began in 2010, when the Royal Bank of Scotland sold its retail lending business — with 250,000 customers — to Abu Dhabi Commercial Bank for a reported $100m.
Two years later, Lloyds Banking Group sold its onshore presence to HSBC Bank Middle East — one of the only foreign banks deepening its mark in the country — for a reported $769m. The deal included about 8,800 personal and commercial customers and a loan book worth about $573m at the time. It covered Lloyds’ retail, commercial and corporate banking businesses but excluded Lloyds’ International Wealth Business in the UAE.
“[Lloyds’] decision to sell the onshore UAE presence follows its group strategic review, announced on 30 June 2011, when it committed to simplify its international footprint,” Lloyds’ UAE country head Richard Musty said when he announced the sale to HSBC Bank Middle East in March 2012.
In September 2013, Britain’s second-largest bank, Barclays, followed suit, announcing it too, would sell its retail arm in the UAE. The announcement came a year after the bank was hit by a series of controversies, including in relation to a recapitalisation deal it secured with Qatari and Abu Dhabi investors in 2008.
During the credit crunch, the Qatar Investment Authority, plus Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family, and Japanese bank Sumitomo agreed to recapitalise Barclays for a reported £6.8bn ($10.3bn). The investment was later investigated by the banking regulators in both the UK and US. The authorities have not taken any action but the controversies cut millions of pounds off the value of the bank’s shares.
Barclays saw more damning headlines shortly after announcing its exit from the UAE when it suddenly started closing the accounts of as many as 1,000 individual and 500 business accounts.
Eventually, Barclays sold its retail component, including 110,000 customers, to Abu Dhabi Islamic Bank (ADIB) for $177m.
Meanwhile, Standard Chartered closed the majority of its small and medium-sized business (SME) accounts in the UAE between August and November last year, as part of an anti-money laundering settlement with US authorities.
The bank said in August it would retain only SME accounts in the UAE that provided higher revenues and less risk of violating money-laundering rules. It had just been fined $300m by the New York state banking regulator because its internal compliance systems had failed to detect or act on a large number of “potentially high-risk transactions,” mostly originating from the UAE and Hong Kong.
The bank said it already had planned to leave those accounts as part of its broader global strategy.
However, the UAE Central Bank warned that any of the account owners — as many as 8,000 — would have the right to sue Standard Chartered for “material and moral damage”.
But the banks’ exits from the UAE have puzzled the GCC market analyst and regional director of Ashmore Group, John Sfakianakis, who says the economy still has plenty of growth potential, all the while on a stronger regulatory footing.
“The UAE was their regional hub, so how do they justify their departure?” Riyadh-based Sfakianakis asks.
“To me, the way they expanded in the region was not well thought out, and it seems it’s not well thought out how they’re exiting the region, because the region is still offering a lot of growth and potential.”
An emerging markets investment manager, Ashmore Group recently chose Riyadh to launch its first Middle East office rather than the UAE or Bahrain, which have in the past been the first ports of call for foreign financial institutions to establish their local headquarters.
The decision was partly due to Saudi authorities announcing they would soon allow direct access to the main stock exchange, the Tadawul, whose total market capitalisation of $530bn makes it one of the largest of the emerging markets.
However, Sfakianakis says the UAE is a highly attractive banking market. He proposes that the increased competition from local banks made life difficult for the foreign institutions, who typically had smaller retail operations in the country.
“The banks in the UAE are becoming more competitive,” he says. “Because of their liquidity and balance sheet potential, they’ve become far more competitive than foreign banks.
“[There is] slower growth in the region, and banks tend to be more nimble these days and go to where there are more opportunities.”
Retail customers became more attractive following the 2008 crisis, which saw many large firms struggling with enormous debts. As the economy began to recover in early 2013, individuals increasingly sought mortgages, car loans and personal financing — but the heavyweights such as Emirates NBD and Abu Dhabi Islamic Bank (ADIB) were already well ahead in the competition for customers.
However, Sfakianakis says there is still room for smaller, foreign banks, and plenty of opportunity in non-retail divisions.
While the fall in the oil price will put a significant dent in UAE government revenues and may hamper growth forecasts, the country only relies on hydrocarbons for less than half its income.
HSBC estimates UAE gross domestic product (GDP) will still grow by 3.1 percent this year, albeit down from 4.8 percent it had forecast before the oil drop. The government has not reined in any of its enormous spending plans, which are likely to keep boosting the economy, while businesses are reporting strong confidence outlooks and expansion programmes.
“It makes no sense to me why [foreign banks] are exiting because [there’s plenty of] growth in the whole region,” Sfakianakis says. “But these decisions are often made in a very neutral environment, far away from the actual location of these banks, so either New York or London. I’m sure those involved in the region are not very happy with those decisions.”
When London-headquartered Barclays announced it would sell its UAE retail arm, it said it wanted to “re-focus its efforts in the UAE on its key strengths in corporate and investment banking and wealth and investment management”.
Later, the bank’s MENA chief executive, John Vitalo, said the decision was “not taken lightly”.
“These businesses [corporate and investment banking and wealth and investment management] are strong, performing well, and have significant future growth potential,” he said in April last year. “The strong interest in Barclays’ UAE retail business is a testament to the high quality of our business, portfolio and talent.”
Standard Chartered UAE chief executive Mohsin Ali Nathani blamed intensifying competition in the country’s banking sector for his firm’s $35m decline in operating profit during the first half of 2014. Pre-tax profit dropped 20 percent, he said.
“The margins are compressing quite a bit despite volumes going up,” he was quoted as saying in August.
Fitch Ratings UAE and Saudi Arabia country manager Redmond Ramsdale says the banks that exited were looking to improve their capital ratios and focus on their domestic markets.
“A lot of these banks fell into hard times [following the global financial crisis]; the one thing they need to do is boost their capital ratios,” Ramsdale says.
“[And] I think all of this is part of the bigger picture, where a lot of these foreign banks are refocusing their strategies on their domestic markets.
“I don’t think it’s any more complicated than that.
“Banks really have changed since the crisis and what we’re seeing now is a renewed vigour for domestic focus.
“The international banking model has changed from what it was. Some banks aren’t necessarily changing but they’re refocusing on what their core is on their international footprint.”
The British banks’ desire to restore capital buffers is not being helped by dwindling profits from their core European markets.
And both foreign and local financial institutions in the UAE have been subjected to new and more stringent regulations in the wake of the credit crunch. But Ramsdale says that does not appear to be an influencing factor on banks’ departures.
“Rules that are coming in from the Central Bank are very sensible rules, the sort of thing that the international banks wouldn’t have a problem complying with,” he says.
However, Grzelak says there is an element of risk aversion.
“I think its general risk aversion; they’re pulling back from any accounts that could make them vulnerable in the future to large settlements from the US government,” she says, in light of the Standard Chartered ruling in New York.
Foreign banks are also pulling back from other regional markets, including Egypt, Jordan, Iraq and some GCC countries.
Oman Central Bank governor Hamood Sangour Al Zadjali said last year the nine foreign banks then operating in Oman had halved their share of total bank assets in the past decade to about 10 percent.
HSBC Bank Middle East, the largest and first foreign financial institution in the region, merged its unit in Oman with Oman International Bank, forming HSBC Oman in 2012. It has also sold its Jordan operations to a local bank and stopped wealth management services in Bahrain and Lebanon.
On the other side of the coin, Gulf-based banks — typically government-backed — are awash with liquidity and have been soaking up the assets for sale.
Qatar National Bank in particular has expanded its retail network through acquisitions across the region, including acquiring stakes in French lender Societe Generale’s Egyptian unit and Libya’s Bank of Commerce and Development, as well as increasing its shareholding in Iraq’s Mansour Bank and in the Tunisian-Qatari Bank.
Dubai’s Emirates NBD bought the Egyptian unit of France’s biggest bank, BNP Paribas, for $500m in December, 2012.
National Bank of Abu Dhabi (NBAD) CEO Alex Thursby recently revealed plans to expand the bank through Western Africa, the Far East and MENA, while Dubai’s Mashreq is reported to be interested in buying US lender Citigroup’s consumer banking business in Egypt.
UAE lenders also have been recording higher and higher profits. Last month, First Gulf Bank and NBAD reported record net profits of $1.54bn and $1.52bn, respectively, for 2014.
The combined assets of Abu Dhabi’s top five lenders — NBAD, ADIB, First Gulf Bank (FGB), Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) — surpassed $250bn for the first time last year.
“Capital ratios for local banks across the board are really healthy,” Ramsdale says. “With the excess liquidity banks have they want to deploy this, so it makes sense for them to buy loan books, as long as the loan book is reasonably good quality, and as such, it’s good profit.
“So it’s mutually beneficial for both sides.”
Grzelak says if more large Western banks shut accounts in the UAE, locally owned banks would be “the most likely to step in and snap up those assets”.
In contrast, HSBC Bank Middle East, a subsidiary of London-based HSBC Holdings, has moved against its British competitors, tightening its grip on the UAE market by buying up Barclays onshore assets, expanding its SME programme and declaring it is not going anywhere.
In September, the bank said it had allocated a further $272m to its International Growth Fund for UAE SMEs after its first funding allocation in 2013 was fully assigned at record speed.
HSBC Bank Middle East declined to comment on its strategy when contacted by Arabian Business during its pre-results quiet period.
Announcing the second funding allocation, the bank’s UAE CEO Abdulfattah Sharaf said the expanded funding showed the institution was confident the SME segment — which contributes about 40 percent of total UAE GDP — was buoyant.
“The country continues to perform very well across sectors and more recently, jumped a further four places in the World Economic Forum’s annual Global Competitiveness Index to twelfth position,” Sharaf said.
“There is no denying that SMEs are a vital component to the ongoing success of the UAE economy.
“We are absolutely committed to these [SME] businesses and the strength of this commitment is also demonstrated in our first half performance, which shows that we doubled our lending to international SMEs. As the UAE enjoys a positive outlook, we believe that this is a pivotal time to truly support SMEs through the fund — helping them execute their international growth strategies to the best of their abilities.”
HSBC Bank Middle East appears to be digging its heels in where its fellow British competitors have pulled up stumps.
“It’s interesting how quite a number [of foreign banks] have gone but then there’s one that’s been quite clear to say how important this market is to them,” Ramsdale says.
There are still 28 foreign institutions with a presence in the UAE, including US giant Citibank, BNP Paribas and the main institutions from other GCC states.
However, falling oil prices may put added pressure on them, and the 23 local banks, to reassess their operations.
In a report published on 22 December, the International Monetary Fund warned GCC banks to focus on maintaining high capital buffers in the face of the sliding oil revenues, which make up a significant contribution of bank deposits in the UAE and also affect broader economic investment and confidence.
The region’s dependence on oil prevented banks from diversifying portfolios, the IMF said, urging them to undergo stress tests to show large exposures and ownership linkages.
“While banks in the Gulf Cooperation Council countries are generally well capitalised, it is difficult for them to have a truly diversified credit portfolio given the structure of their economies, which exposes them to risks that require a greater amount of scrutiny,” the study says.
But Grzelak says the UAE will continue to attract foreign interest to its financial sector for a number of reasons.
“There’s some excitement over Saudi Arabia as it opens up to foreign investment more than it has in the past and the opportunities that presents, but there’s cultural and legal reasons why the UAE is still very attractive for Western companies looking for business in the Middle East,” she says.
“Given the UAE and broader Middle East’s increasing trade links with Asia, Gulf banks are looking to move into China and it’s likely that we’ll see movement in the opposite direction as well — big Chinese and other Asia-based banks looking to move to the Middle East over the next decade.
“Banks tend to follow their clients to other countries so as trade flows between the Middle East and Asia increase, so will financial sector linkages. Over the next decade it’s likely we’ll see Asian banks supplanting the place once held by large European banks in the Middle East.”
As the saying goes, what’s one bank’s trash is another bank’s treasure.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
The above mentioned Banks are not Customers Service Oriented.. They have some fixed services ..at the fixed terms and conditions.. If the customers are interested they should take or leave it.. This way.. the Bank can not grow.
They have to be flexible and facilitate the customers.. Because of customers the Banking services are required.. If there are no customers.. who needs the Bank??
The above mentioned banks should change their Operating style to be facilities oriented Banks.. then only they can survive in Dubai Market.. Good luck and our good wishes..
The fundamental of any service provider in any industry is Customer care. The banking system in UAE is mainly focus is big assets management and corporate linked to the government or International head quarter already banking with foreign institutions. Compare to other big cities/country like US, Japan, UK ,the UAE banking system is extremely poor in term of services. That's a reality. In a country who has the number one Airline by far with an operation set up with top quality managers and annual growth as well as a Hotel/Entertaining sector as good as it could be anywhere else in the world , totally fail on the banking sector. Very low qualification staff, extremely rigid structures with no business oriented approach is a BIG weakness for the country. When banks are claiming the SME is important this is just to show a will to journalist and international opinion. But everyone knows reality is the opposite. Try to start a business in UAE and you will see the main hurdle; Banking
Having worked in the banking sector for a decade, International banks were always at a disadvantage when it came to them versus the local banks.
-They could not have unlimited branches like domestic banks,and were usually limited to 1 an emirate, unless they took over a competitor.
-They had to charge higher interest rates for borrowing , and lower rates for savings versus domestic banks. So they were always lost when consumers shopped for car loans and mortgages.
- Other limitations on hiring, lending, central bank rules just made it difficult to level the playing field with the national banks, leaving them with no choice but to pack up and focus on other markets
Given all this, it comes as no surprise many are shutting down their consumer division, and focusing on areas where domestic banks don't have exposure and regulation is weak- Investment banking, SWF advisory , Private Banking, and Asset Management.