Recently, Tahseen Consulting’s Chief Executive Officer, Walid Aradi, spoke with Ryan Harrison from Gulf Business regarding his thoughts on the competitive landscape evolving in the UAE retail and commercial banking sector. In a wide-ranging discussion, Aradi explained some of the reasons why local banks such as Abu Dhabi Commercial Bank, Emirates NBD, Mashreq, and First Gulf bank have been performing well while internationals have been downsizing their operations.

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PLUS: GULF BUSINESS INDUSTRY AWARDS WINNERS

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Local banks have been quick to lend more and offer more
sophisticated services as international banks nurse lingering
wounds and lose marketshare.
U
Al h.mks havE:' aggress1vrl>'
l'Xp.tntled the1r COijlOrittl' Joan
books in recent years, a surge that
man}' s.1y could signal ,, long·tt•rm shift tn
local financi.tl services.
Mostly, 11':- been ,t C<ISC or lllhng !he
gap lett bv lllll'mauonal lenders smce the
2.008 downturn. Europt.>an b,mk.-, ha,·e
been on hfl' ~uppon tor a wluh.' now and
have inm'asmglr retrenched to tend to
worsening condillons at home
Walid Aradi, C£0 of lah~Cl'll Consulting.
says ··1 hey Wl're seeking to hnut thetr
exposure Ito the .~1iddle E.lst), tocus on
rebuildmg thr1r compeU!Ive advantage in
their home countries, and unproVt' their
b.1lance sheets. This left the I!Xtl banks,
which came oil a pt.>riod ot consolidation,
ready to ptck up the slack should tht.>
econorruc conditions improve."
He Sdys with UAE I?COIIUI11k' growth
hovermg around four per et'lll, and an
mcreased .lppt:'tlle to lend due to tht.>
introduction of loan caps and mort? defint'l
l<>nding cntena, local banks responded
by aggrt?.ssiVl'l>• markellng tlwir l'Xisting
products. and offcnng new Olll'S. They
have abo bt.>n<'htl'<l from an tnLTeased pace
of governml'nt mfrastructure protects.
Other lavou~<thle condluons have opent?d
up the JocaJ market for UAE lendt•rs,
mcludlng ·• return of excl-ss CJsh m the
system .1s the Impact of the UAE housing
cnSJs tadt'll. llus hoosted thl' liqUJd!ly
1'0 JCTOBER 2013
"Analysts say domestic
financial institutions
have shaped up their
portfolios and are
starting to offer more
s "s+i.- ted products
in conventional and
Islamic banking than
before. As a result
they've been eating
up market share and
have witnessed buoyant
growth recently."
pos1tions ol mo~t hank.-., who wert! .tlso
holsterl'd br ~trong capual intlow~ causl'd
hv the Arab Spnng
Analvsts say dome!HIC fin.1nci,ll
insututions h.we sh,tped up thear ponfoho>
clnd .He stanmg to otter more sophasucatl'd
products m convenuonal and blamtc
h,lnking than bl'flltl'. A~ a result. tlwy've
been eating up market share and h.ave
w1tnessed buov.uu growth r~?Cently.
The UAE Monthly Bankmg lndlc<ltors.
published by the UAE Central R.mk,
fihow that desplll' ex.penencmg modest
vear·on-year growth of 2.6 per t:t'nt
m 2.012. m loans .111d advances. the
increase in the ftrst st•ven months of 2013
excel'ded 4.3 pt·r cl'nt. Champtonmg th1s
growth were local banks such as ADCB,
Emtr.lies NBO, lashreq dnd First Gulf
Bank, hu:h have been some of the
most aggressive pia)e1s 1n filling the
gap ll'll behind by the downsizmg ol
opN.lllons or some mternationais.
Lcndmg to gowrnment·relatl'd entllll'S
(GRI:S) IS CUITl'llll} well above the cethngs
cnv1 agl'l.l by the UAE wntral bank last
ycJr, whtch has led to concerns about .1
rcpe.tl ol Dubat's COij>Orate debt cns1s.
Accorllmg to a receru Merrill Lynch
rese,uch note, UAE hanks' GRE exposure
UAE banks saw year-on·year growth of 4.3 per cent
for the hrst seven months of 2013.

3. "Championing this
growth were local
banks such as ADCB,
Emirates NBD, Mashreq
and First Gulf banks,
which have been some
of the rr ggressive
player in filling the
gap left behind by the
downsizing of operations
of some internationals."
IS at Its highest level as .1 pl'rcl'nt.Jge ot
capatal suace the 1970~.
ew ligures show thl' domesuc b.mkmg
ector lt.h extended $42 balhon In cn.'tht
to the gowmment and GRE.., s111ce the
hanking crisas of 2008.
A~ a r~·sult. exposurl' to thl'
gowrnruent and non·hn.1nct.11 pubhc
THE RETURN OF
GOVERNMENT LENDING
~h.('re have been fresh concerns about
the amount local banks are tending
to state·linked compames. Some fear
there are stgns of a taclilng time bomb
hke that w1tnesset1ln Duba1 an the lead
up to 2008 and 2009.
In September, analysts at Bank
ol Amenca Merrill lynch sa1d the
exposure of UAE banks to government·
related entitles was at Its highest level
as a percentage of cap1ta11or over 40
years The bank also warned there IS
hltle chance of authont es enforcmg
stnct e~posure lim1ts.
BOAML said the UAE banktng
sector has extended $42 billion an
crad1t and as a result exposure to the
government and non·tananc1al public
enterpnses as a percentage of bank
capital Is at 104 per cent
Government ent1ties relied heavily
on local banks to support the
restructuring process 1n the aftermath
of the Duba1 property crash, w1th
fore gn banks takmg the1r money out
of the reg1on.
l'ntt'rpnses as a percent.lgt• ol h.lllk
cap1t.11 I!> dl 104 per cent
fl'w wtll forget the ntogauvny that ram~
down on the UAE. pantcul.uly m the
llltt'nl.lltonal m~ta. lollowmg the nubai
World .md Nakh~l d<"fault~.
Tlw GREs telied hcavtlv on local banks
to support the restructuring process an the
aflrrmath or the Dub.l1 proPt•ny cra.~h
Tht• ~ll'rtill Lynch notl' -.ays "Th1g rully
compensat~ lor the hm'tgn outtlows but
incre.bt.'t1 the banking sel'lor'5 exposure
,Js Pl'rcent.1ge of cap11JI by 26 pt•rcemage
points. !"he credit stock ,1lso suggt•sts very
roughly that about 50 pt.·r cl'nt ot Dubai
Inc debt ts owned domt.>sllc,!lly.'·
In 201.!, the central b.mk tnl'd to
Introduce ntles as p.ut ot ,, dnve to
n•duce nsks and prPVt'nt any rt'l'uiTI.'nce
of Duha1 2.009-lDLO coiiJp~l'. hut
tlw dt'l:tsion was droppt•d .1ftt>r hanks
complauwd the rt?gulallons would slow
BANKING
growth and Cduse tnJtor lossel'
Howevl'r, last month, .tbdulaziZ
al·Ghura1r, head ot the ll.1110nal banking
mdustry .tssOCiallon and chtl'l execuuve
ot Mashrt'tl. said the cemr,!l h.mk had
're·t.lblt>tl' t.he caps on GRI. lendmg and
was .tnuoundng a rev1sed set ol sanctions
l.llt'l this year.
It's .m amponam developml'nt due to
the SIZe of the loan markt•t that's now up
tor grahs.
Arconhng to Amo M.Jtt•rbnagger,
editori,ll c.ltrector at Insult• lm•estor. ..Tile
llCNln.J) loan market h,ls .1 size of around
0112.5 btllion a year ami togt•ther wllh thl.'
corporah.' loan markt•t the ovcr.11l s1ze
ol the lmdmg mJJket 111 tht• UAF: IS an
estunatro Dhsl.S mUton. and loan growth
in 201.~ so tar was enom1ous ,1g.11nst 2012..
Local h.1nks can prob.1bly get a ~lice of as
much .1s 60- 70 per Cl'lll ol that market ·
Mi'anwhtle. analv~1s by Frost & Sulliv.Jn
The UAE Central Bank is announcing aset of mortgage caps later th1s year.
gulrbuslness.com I T1

4. [ BANKING
suggests that if the st,ue of the global
economy does not Improve tore1gn banks
might have to pull back their oper.:stions in
the UAE even further, which ts expected 10
create a funding g.:sp. II has emerged that
European banks lent around 25 per cent of
the UAE economy's COP as of September
2011. according to the consulnng firm.
-L.9)-~' <U
mashreq
While this may seem an added
opportunity for local banks to further
strengthen their presence, banks in the
UAE are facing an issue of declining
margins in the corporate lending segment
as huge companies are increasmglv
demand.lllg lower borrowrng rates Hence,
UAE banks may not find corporate
lending an attractive opportunity and
could instead locus on other segments
such as rrtail loans. UAEbanks are facing decliningmargins in thecorporate lending segment.
But if a funding gap IS created in the
tuture. companies might be willing to
uncfenake higher borrowing costs in
the wake of a shortage in credit supply
making corporate lending anractive tor
the UAE banks.
The safe bet i~ that it's likely that the
market share of local banks will increase
marginally in the future wh1le fore1gn
banks will try to retain thetr current loan
book s1ze 111 the UAE.
A FIGHT FOR CORPORATE DEBT
What is certain though is that overall,
local banks that managed to mcrt?ase
their share of the corporate and consumer
lending markets recently will find it
increasmgly difficult to maintain past
levels of profit.1bilily
This is partly down to the level of future
economic growth in the UAE, which is not
likely to reach the heady hetghts posted
in 1005 or 2007. And measures. like
Al-Ghurair's caps 011state enutv lenchng
Barclays recently ditched 1ts retail arm in the latest sagn that the battle for
supremacy 111 UAE corporate lending IS heating up.
"Barclays has decaded to re-focus Its efforts an the UAE on 1ts key strengths in
corporate and investment banking and wealth and mvestment management," the
bank satd.
The Bntlsh bank, under CEO Antony Jenkins, announced it is cuttmg at least
3,700 jobs globally, reining In pay of senior bankers and closing businesses across
the group tn the face of new capital rules. The UAE corporate re·tocus is part of th1s
wider change, and follows a number of other retail exits in recent years.
In 2010, part state-owned Abu Dhab1Commercial Bank bought the retail bankmg
operat1ons of RoyalBank of Scotland 1n a $100 mtlhon deal.
Barclays and other rore1gn banks are mcreas1ngly lacing challenges to compete In
the UAE against cash-nch local rivals who are finding it easier to meet stricter rules
on risk.
Barclays' potential sate may Impact up to 280 employees, a source familiar with
the plan told Reuters.
Stgmftcantly, tt was confirmed that the bank will keep its existing branches In the
UAE to servace corporate banking clients.
72 I OCTOBER 2013
and changes to capital and liquidity
reqULremt!llts, could have a dampening
effect and ra1se cost pressures on the
banking secror.
Local lenders are facing pressure to
tmprove products and services if they're
to keep momemum up in their corporate
lendmg business.
Sheetal Kothari, rese.trch analyst,
Busmess & Financ1al Services Practice.
Frost & Sullivan. says: "We recommend
domestic banks m the UAE focus on
relationship management skills. ensuring
conunuou~ credit .1ssessment of ihe
borrower and innm•ate customised produd
offerings and strategies for cross selling
to improve their mJ.Igins in the corporate
lendmg segment."
Others rns1st that UA£ banks must
do more to attract global talent and
lorm greater alliances with global
banks to overcome their limited
international footprint.
There is a chance that local players
in the UAE could make their gains in
recent years permanent. However.
without fully seizlllg the opponurutv.
local banks will tmd themselves having
to fend off pressures from global banks
when their appetite to invest in emerging
markets returns as a consequence of
improved market conditions in their
home countries. Cl