The GCC Banking Sector
Analysis of the GCC and the UAE in Particular
Gallup Consulting
April 12, 2011
Rafiq Ladha
Associate Consultant
Copyright 2008 Gallup, Inc. All rights reserved.
Perspective on the GCC Banking Sector from 2008 to
Present
Banks in the GCC are still coping with the challenges faced from the
economic crisis that occurred in 2008
Profitability of banks is still under pressure as banks are being forced to take
high provisions against non-performing loans (NPLs), mainly in the UAE
NPLs in 2010 remained stagnant for Kuwait and Saudi Arabia, Oman saw a
decrease of 31%, Qatar had an increase of 41% and the UAE had by far the
highest change with an increase of 146%
Banks capital adequacy ratios (CARs) remain relatively high due to capital
injections from public funds in the UAE and Qatar and from private capital in
Kuwait and Saudi Arabia
Issues concerning the debt repayment of Dubai World and Dubai Holding
triggered concerns amongst investors about investing in the region
Saudi Arabias Saad and Algosaibi groups, two conglomerates that borrowed
nearly $20 billion, may default on their payments
A considerable portion of this $20 billion came from banks in the GCC
Copyright 2008 Gallup, Inc. All rights reserved.
Money Supply of GCC Financial Sector from
2009-2010
Copyright 2008 Gallup, Inc. All rights reserved.
Source Company Financials, Global Research
Deposits of GCC Financial Sector from 2009-2010
Copyright 2008 Gallup, Inc. All rights reserved.
Source Company Financials, Global Research
Loans of GCC Financial Sector from 2009-2010
Copyright 2008 Gallup, Inc. All rights reserved.
Source Company Financials, Global Research
Liquidity (Loans/Deposits ratio) of GCC Financial
Sector from 2009-2010
Copyright 2008 Gallup, Inc. All rights reserved.
Source Company Financials, Global Research
The Major Highlights from 2009-2010
Kuwait and the UAE had negative GDP growth in 2009
Kuwaits money supply has been fluctuating while Bahrain saw a massive drop in
the 4th quarter of 2010
The general trend for deposits in all GCC countries is upward
The general trend for loans in all GCC countries is upwards except for in Bahrain
where there is significant variation
Loans to deposits have been decreasing gradually towards the end of 2010 except
for in Kuwait
4th Quarter of 2010:
Money supply increased or remained stable in all countries except Bahrain where it
decreased by over 6%
Deposits grew in all countries except in Bahrain and Qatar
Loans increased in Kuwait and Bahrain and decreased in the remaining GCC
countries
Liquidity decreased across the board except in Kuwait
Copyright 2008 Gallup, Inc. All rights reserved.
GCC Change in Bank Profitability (%) and
Regional GDP Growth (%)
Change in Bank Profitability (%)
The banks in Kuwait experienced the largest
drop in profitability during both periods
Regional GDP Growth
Qatar had, and is expected to have,
by far the highest percentage GDP
growth in the GCC between 2009
and 2011
Saudi
Region
Arabia
UAE
Qatar
Kuwait
Bahrain
Oman
Copyright 2008 Gallup, Inc. All rights reserved.
Source: Kamco Research; and Authors estimates
Source: Haver Analytics, SHUAA Capital Research
GCC Non-financial Sector Profitability and Growth
of Credit to Private Sector
GCC Non-financial Sector Profitability
Qatar, Saudi Arabia and the UAE had high nonfinancial sector profitability between 2006-2009
GCC Growth of Credit to Private Sector
Credit growth in the private sector in 2009
dropped dramatically following the recession
across the GCC
10
Copyright 2008 Gallup, Inc. All rights reserved.
Sources: Country authorities and IMF staff estimates.
GCC Nonbanks and Banks External Financing
GCC External Financing of Nonbanks
The UAE had the highest external financing
of nonbanks in the entire GCC
GCC Banks External Financing
GCC states, primarily Bahrain, the UAE
and Saudi Arabia, borrowed considerable
amounts of money through external
sources
11
Copyright 2008 Gallup, Inc. All rights reserved.
Source: BIS Consolidated Banking Statistics. Includes foreign currency interbank lending extended by foreign bank branches in GCC countries.
The Recession Impact on GCC Banks and Actions
Taken to Minimize Risks
IMPACT
Liquidity significantly squeezed in 2008
with GCC banks becoming increasingly
reliant on external financing peaking to
$103 billion in September 2008
High provisions due to NPLs and
significant exposure to real estate,
construction & large corporate entities
Due to these provisions profitability of
banks has been negatively affected
ACTIONS
Governments of different GCC states injected cash
into banks to provide them with sufficient liquidity
The UAE banks in particular received capital
injections by the government in 2009 raising their
capital adequacy ratio (CAR) to 17.6% and made
them among the best capitalized in emerging
markets
The government of Qatar purchased equity and real
estate assets of banks of up to $6 billion (6% of
Qatars GDP) in the first half of 2009
High provisions were taken in 2009 and in 2010 to
offset bad debts and provide opportunity for growth
going into 2011 and beyond
12
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Outlook on the GCC Real GDP, Crude Oil Output &
Consumer Price Inflation
13
Copyright 2008 Gallup, Inc. All rights reserved.
Source: National Bank of Kuwait: GCC Economic Outlook
The Future for the GCC and its Banking Sector
With oil prices forecasted to remain relatively high throughout 2011 the GCC
states will have enough cash to support banks needing cash injection yet
growth rates will not ascend to levels witnessed between 2003-2008
Crude oil output is also projected to increase at a modest rate providing
additional support to the GCC while inflation is anticipated to augment but at a
steady tempo
Qatar will experience the highest growth as its banks have the lowest risk
profile and the countrys GDP is expected to grow by double digits
Overall GDP is expected to grow across the GCC going into 2011 except for in
Oman where a slight decrease is forecasted
Growth in credit volumes is projected to be between 8-12% and provisioning
requirements are expected to ease into 2011 and beyond (Global, 2011)
The impact of the recession on the GCCs financial sector indicates that it is
relatively stable although there are high provisions due to high credit growth
rates prior to the crisis and also due to significant concentration in
construction and real estate
14
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How Important is Customer
Service in Banking?
AT Kearney 4 Main Causes of Customer
Dissatisfaction with Banks in the GCC
Salespeople have
little knowledge of the
products they are
selling
Insufficiently
Trained
Salespeople
No multichannel touch
points
Customers
have limited
call-center or
website options
Only 10% of expatriates in
the UAE are satisfied with
their banking experience
Lack of
Information
Unresponsive
Staff
Customers do not receive
all information about a
product and later find
hidden surprises
Customers do not receive a call back at
the time promised or at all
16
Copyright 1993-1998, 2008 Gallup, Inc. All rights reserved.
Source: AT Kearney, GCC Banks: On the Road to Maturity
AT Kearney Customer Satisfaction Increases
Retention, Advocacy and Cross-selling
Customer Satisfaction Scores and the Impact on Three Important Variables
80%
75% 75%
70%
70%
60%
56%
54%
50%
46%
44%
Won't switch banks (retention)
40%
40%
Will recommend banks to others
(advocacy)
32%
30%
20%
26%
26%
Will consider repurchase of other
products and services (cross-selling)
20%
10%
0%
Dissatisfied
Indifferent
Satisfied
Highly satisfied
Overall customer satisfaction scores
17
Copyright 1993-1998, 2008 Gallup, Inc. All rights reserved.
Source: AT Kearney: More than Just Lip Service
Booz Allen Hamilton on What Customers Want in
their Banking Experience at the Branch Level
Branch Experience Factors that are Essential
Staff Knowledge of Customer
Customers want the banks staff to know about
them and what their needs are to avoid costly time
of having to repeat themselves over again and over
again to various staff members
Product Knowledge
Bank staff typically lack
sufficient knowledge of
products they are
selling to customers
Short Wait Time
Customers do not want
to wait for long periods of
time when they visit a
branch as they are
working and have other
obligations
Privacy
Consumers want privacy
when talking to their
financial advisors about
how to invest their
money
Query Resolution
Customers want their
questions to be
answered accurately and
promptly rather than
having to wait
18
Copyright 1993-1998, 2008 Gallup, Inc. All rights reserved.
Source: Booz Allen Hamilton: Striving for Growth Best Practices in Retail Banking Sales and Service Channels
Ernst and Young on Banking Service in the GCC and
Specifically in the UAE
45% of GCC banking customers consider personal attention to be highly
important to them but only 7% receive such attention
When it comes to what customers want the most important element is customer
service while fees and charges levied by the bank comes in at 4th most vital
The single most important reason for switching banks was related to a specific
service failing as 45% of surveyed customers in the GCC illustrated
20% of bank customers in the UAE are considering changing banks due to
severe dissatisfaction and grievances
Customer attrition rates in the UAE are the highest in the GCC at 13%
The proportion of customers in the UAE who want lower fees is the highest in
the GCC
What if nothing is done?
Customers have multiple alternatives to choose from in the UAE with a choice of 52
banks and close to 1,000 branches for a population of approximately 5 million and as
highlighted above they will switch banks if their needs are not being met
19
Copyright 1993-1998, 2008 Gallup, Inc. All rights reserved.
Source: Ernst & Young: Retail Banking in the GCC
The Background on the UAE
The Background on the UAE Banking Industry
The banking sector in the UAE has 24 local banks and 28 foreign banks
operating in the country for a total of 52 banks
The UAE banking sector in the 4th quarter of 2010 was the worst off in the
GCC exhibiting a decline of 24%QoQ
Provisioning has been a major factor affecting banks profitability
Banks in the UAE had high provisioning levels in 2010 Emirates NBD
(ENBD), Abu Dhabi Commercial Bank (ADCB) and First Gulf Bank (FGB)
showed the highest levels due to renegotiated loans belonging to Dubai World
and Dubai Holding
Only the National Bank of Abu Dhabi (NBAD) and ADCB announced their
exposure to Dubai World which stand at approximately AED 1.25 billion and
AED 6.6 billion respectively
Low domestic growth leading to increasing competition amongst domestic
banks looking to grow by taking each others market share
Islamic banks are losing their competitive advantage as conventional banks
are offering Islamic products and there is minimal product differentiation
21
Copyright 2008 Gallup, Inc. All rights reserved.
Ownership of the UAE Banking Sector in 2007 (%)
22
Copyright 2008 Gallup, Inc. All rights reserved.
Source: Bankscope, Bankers Almanac, and IMF staff
UAE Foreign Debt from Loans Taken
23
Copyright 2008 Gallup, Inc. All rights reserved.
Sources: JEDH, Dealogic, and IMF staff estimates.
Money and Finance in the UAE
Money Supply
Commercial Bank Assets
Bank Claims (Private Sector)
Policy Interest Rates
24
Copyright 2008 Gallup, Inc. All rights reserved.
Source: National Bank of Kuwait: GCC Economic Outlook
Exchange Rates, Stock Market Indices and Bank
Provisions & Interest Income
Stock Market Indices
Exchange Rate
Provisions & Investment
Income
Provisions
Investment Income
25
Copyright 2008 Gallup, Inc. All rights reserved.
Source: National Bank of Kuwait: GCC Economic Outlook and banks' annual and quarterly reports from Zawya; and Fund staff estimates
Bank Loans Were Highly Concentrated in Households
and Real Estate & Construction in 2008
UAE: Bank Loan Distribution by Sector (%)
30
25
20
2002
15
2008
10
5
0
26
Copyright 2008 Gallup, Inc. All rights reserved.
Source: IMF Working Paper, Country authorities; and authors' estimates. Note: Construction includes both residential and commercial.
Strengths and Weaknesses of the UAE Economy and
Banking Sector
Strengths
Oil output is increasing and oil prices are
reasonably high and predicted to remain
around the current level
Increasingly diversifying economy driven by
Abu Dhabi investing its sovereign wealth in
various sectors
High provisioning levels taken in 2009 and
2010 allowing for better financial results in
the near and long term
A large proportion of local banks are majority
owned and backed by the governments of
Abu Dhabi and Dubai
Weaknesses
Banks have huge exposure to the domestic
construction and real estate sector
High NPLs due to Dubai World, Dubai
Holding, Saad and Algosaibi groups
UAE dirham pegged to the weakening US
dollar
No credit history of expatriate population
Customer service is still lagging behind
developed countries such as the US
Only 10% of banking customers in the
UAE are satisfied with their banks
compared to 76% in the US (AT Kearney,
2008)
27
Copyright 2008 Gallup, Inc. All rights reserved.
Financials of Major Banks in the UAE (2009-2010)
Comparisons of Year-on-Year Averages
Bank Name
Emirates NBD
2009
Revenue
(AED000)
2010
Revenue
(AED000)
2009 Net
Profit
(AED000)
2010 Net
Profit
(AED000)
Change in
Revenue
(%)
14,983,889
6,364,434
13,051,175
9,291,526
3,345,836
3,019,937
2,339,508
3,683,159
(12.9)
8,575,020
8,538,019
7,619,827
8,602,637
3,310,335
(559,448)
3,498,225
10,530,924
Dubai Islamic Bank 5,186,477
Emirates Islamic
3,797,948
Bank
Union National
Bank
RAKBANK
Overall
share of
Revenue (%)
Net Profit
Margin
(%)
45.9
16.1
11.4
17.9
39.6
3,420,425
(0.43)
10.5
40.1
381,001
12.9
10.6
4.4
77,778
1,023,345
201
13.0
9.7
11,500,226
1,207,491
806,523
122
14.2
7.0
4,313,706
130,794
61,262
13.5
5.3
1.4
4,105,478
4,262,657
1,160,141
1,358,992
3.83
5.2
31.9
2,111,340
2,651,746
726,149
1,002,751
25.6
3.3
37.8
Sharjah Islamic
Bank
884,645
2,233,616
260,135
266,409
152
2.7
11.9
Mashreq
7,782,771
6,250,855
1,000,464
803,498
(19.7)
7.7
12.9
National Bank of
Abu Dhabi
First Gulf Bank
Abu Dhabi
Commercial Bank
Abu Dhabi Islamic
Bank
28
Copyright 2008 Gallup, Inc. All rights reserved.
Source: Zawya
Financial Comparison of Major Players
Emirates NBD (ENBD) has the highest revenue but is less profitable than both
National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB)
Both NBAD and FGB have net profits that are approximately 40% of their
revenues but RAKBANK and Union Bank are not far off with net profit ratios of
37.8% and 31.9% respectively
Abu Dhabi Islamic Bank (ADIB) is the most improved bank with a 200%
increase in revenue and 1300% increase in net profit
Emirates Islamic Banks (EIB) net profit is only 1.4% of its revenue
ENBD, Dubai Islamic Bank (DIB) and EIB all suffered considerable decreases in
their net profits with ENBD and DIB seeing over a 30% drop and EIB witnessing
over a 50% plunge
ENBD and Mashreq had a decline in revenue from 2009 to 2010 and FGB was
practically stagnant with a decline of only 0.43%
ADCB came back from a sizeable net loss in 2009 to a net profit in 2010
29
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Macro Forecasts of the UAE Real GDP, Crude Oil
Output & Consumer Price Inflation
30
Copyright 2008 Gallup, Inc. All rights reserved.
Source: National Bank of Kuwait: GCC Economic Outlook
Future of the UAE Economy and Banking Sector
Economy Forecast:
Real GDP expected to grow by 3.6% in 2011
Hydrocarbon output expected to increase by 5% in 2011 which accounts for approximately
one third of the countrys GDP
Growth in the non-oil sector is likely to remain low with Abu Dhabi growing at a rate of 45% and Dubai only expanding modestly
Inflation is to remain relatively low due to falling housing prices although potential risks to
watch out for include rising food costs and the devaluation of the US dollar which the UAE
dirham is pegged to
Higher oil prices and comparatively unchanged budget spending could result in a budget
surplus of 12% of GDP in 2011
Banking Sector Forecast:
The debt rescheduling agreement between Dubai World and its creditors has provided
much needed confidence in the financial sector
The sector will grow at a steady pace but with the number of banks in the UAE being so
high given the low population banks will still be intensely competing against each other
Provisioning against NPLs will ease into the future and banks will start seeing growth but at
a steadier rate than the levels witnessed prior to 2008
31
Copyright 2008 Gallup, Inc. All rights reserved.
Note: Several figures used from National Bank of Kuwait: GCC Economic Outlook
References
National Bank of Kuwait Capital, December 2010, UAE Banking Sector.
Hassan, A., Khamis, M., Oulidi, N. International Monetary Fund Working Paper
WP/10/87, (The GCC Banking Sector: Topography and Analysis), 2010.
Gemes, A., Konik, F., and C. Moss, 2007, Striving for Growth: Best Practices in
Retail Banking Sales and Service Channels, Booz Allen Hamilton.
K. Haque, 2011, GCC: 2011 Macro Outlook , Shuaa Capital.
International Monetary Fund).
Global Investment House, March 2011, GCC Banking.
Bennie, G., Qoussous, F., and S. Jaffery, 2011, Retail Banking in the GCC:
Competing for Customers, Ernst & Young.
Khamis, M., Senhadji, A. International Monetary Fund, (Impact of the Global
Financial Crisis on the Gulf Cooperation Council Countries and Challenges
Ahead: An Update), 2010.
National Bank of Kuwait, March 2011, GCC Economic Outlook.
R. Madha, 2010, Banks Rebalancing Recommendations, Rasmala.
32
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References
Handy, H., Savard, K., Gilmour, A., Agha, R., Ahmed, T., and J. Reeve, 2009,
The UAE Economy: Sustainable in the Face of a Serious Global Recession ,
Samba Financial Group.
K. Haque, 2011, GCC: 2011 Macro Outlook , Shuaa Capital.
International Monetary Fund).
Global Investment House, March 2011, GCC Banking.
Bennie, G., Qoussous, F., and S. Jaffery, 2011, Retail Banking in the GCC:
Competing for Customers, Ernst & Young.
Khamis, M., Senhadji, A. International Monetary Fund, (Impact of the Global
Financial Crisis on the Gulf Cooperation Council Countries and Challenges
Ahead: An Update), 2010.
National Bank of Kuwait, March 2011, GCC Economic Outlook.
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References
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