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Dubai: The UAE Central Bank is likely to consider many options before opening the market to foreign lenders, according to a report by National Bank of Dubai (NBD).
"Given the commitments under the General Agreement of Trade in Services, the WTO agreement and the proposed Free Trade Agreement with the United States, the UAE is likely to further liberalise its banking and financial sectors," the report said.
According to it, the Central Bank thinks the UAE financial market is not over-banked because the economy is expanding. However, the current declining trend in interest spreads and the likely pressure that might arise from opening up the market to increased competition by domestic as well as foreign banks will be a challenge to the sector.
Since the banking crisis of the 1980s, very few new banks have been permitted to enter the UAE. At that time one bank was liquidated, nine disappeared and eight were consolidated and recapitalised into several institutions.
Now there are 47 commercial banks and nine representative offices with a total of 697 branches in the UAE.
Large market
According to the Arab Monetary Fund, the UAE has the second largest bank capital after Saudi Arabia. UAE banks are showing steady growth and the country is likely to become a top regional player.
"Given that environment, opening up the financial market is inevitable. The GCC countries are likely to open up their banking sector to cross-border branches following Kuwait's decision to grant licences to foreign banks. However, as indicated by the UAE Central Bank governor, it will not be automatic and the bottom line is the profitability of banks and the financial stability of the market," the report said.
Deposits and loans per branch increased by 60-70 per cent between 2003 and 2006. Profit per branch dramatically increased by 140 per cent during 2003-05, but in 2006 and 2007 it seemed to be declining or, at best, stagnating.
Similarly, the capital/assets ratio, return on equity and return on assets peaked in 2005 and started either to decline or to stagnate.
"The declining provision for non-performing loans in 2006-07 must be carefully monitored to make sure that it's not a generic problem of provision being sacrificed to increase the accounted profitability," the report said
It said banks must ensure that expansion is not at the cost of overall profitability
In an over-banked market, continued growth is a greatest challenge. Naturally, mergers do occur to achieve in such a market to ensure further growth and expansion. The merger announcement by Emirates Bank and National Bank of Dubai has made the industry think in terms of more mergers.
"There is a general belief that the UAE is over-banked but then the above merger need not necessarily be a marker of an over-banked market. UAE market is under-banked neither, given the profitability indicators," the report said.
Based on the predicted sound macroeconomic and banking fundamentals the report hinted at a more positive outlook for 2007 and beyond.
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