Standalone UAE Islamic banks unlikely to merge: analysts

Standalone Islamic banks in the United Arab Emirates are unlikely to merge among themselves while the overall banking sector moves towards consolidation, say analysts.

The UAE banking sector is undergoing consolidation following the merger of First Gulf Bank and National Bank of Abu Dhabi in 2017 that created First Abu Dhabi Bank (FAB), the country’s biggest bank by assets. The merger also created its wholly-owned subsidiary First Abu Dhabi Islamic Finance, or FAB Islamic.

A potential three-way merger led by Abu Dhabi Commercial Bank, and involving Union National Bank and the standalone Shariah-compliant Al Hilal Bank, is still in talks.

Analysts approached by Salaam Gateway pointed out the two cases involve intra-Abu Dhabi institutions that have the same shareholders.

“We continue to think that mergers will continue to be the exception rather than the norm,” Mohamad Damak, senior director and global head of Islamic finance at credit rating agency S&P, told Salaam Gateway.

“[W]e haven’t seen any merger across the Emirates to date but rather mergers within the same emirate,” he added.

The intra-emirate alignment would make the three-way merger led by ADCB “likely”, said Khalid Howladar, managing director of risk, rating and Islamic finance advisory firm Acreditus.

“ADCB could probably use a boost to its Islamic window given the positive retail dynamics of the sector but Dubai Islamic Bank would be a good match given its complementary Dubai focus,” said Howladar.

“However, the common government shareholding of the three Abu Dhabi banks make any merger much more politically and hence practically likely,” Howladar added.

UAE has seven standalone Islamic banks, three of which are headquartered in Dubai: Dubai Islamic Bank (DIB), Emirates Islamic, and Noor Bank. The others are Abu Dhabi Islamic Bank (ADIB), Sharjah Islamic Bank, Al Hilal Bank and Ajman Bank.

The standalone Islamic banks and Shariah-compliant windows of conventional banks in the UAE have been steadily growing their market share, from 17.3 percent of total banking assets in 2013 to 18.9 percent in 2015 to 20.6 percent in June 2018, according to central bank data.

They have also been more profitable than the overall banking sector, scoring 1.7 percent, 1.5 percent and 1.7 percent return on assets (ROA) respectively from 2015 to 2017. In comparison, the banking sector overall saw lower ROA at 1.6 percent, 1.4 percent and 1.5 percent during the same three-year period.

SEEKING GROWTH OVERSEAS

Asad Ahmed, managing director at professional services firm Alvarez & Marsal, said UAE’s bigger standalone Islamic banks will continue to expand, and they’ll do so organically or inorganically. Historically, they have looked abroad for growth.

“A number of banks in the region have adopted various expansion strategies. DIB, for example, has – in addition to rapid growth in UAE – set up in Kenya with a view to participating in the growing Islamic banking market in East Africa, and Abu Dhabi Islamic Bank has a sizeable franchise in Egypt,” he said.

DIB also has banking operations in Pakistan and Indonesia and holds a stake in Bank of Khartoum. ADIB has international presence in Iraq, Saudi Arabia and the United Kingdom.

DIB CEO Adnan Chilwan told Bloomberg TV in October the bank was “always on the lookout as an acquirer” but that “there’s nothing on the cards right now”.

UAE’s biggest standalone Islamic financial institution, DIB, was last year designated by the central bank as systemically important, another way of saying it is “too big to fail”. It is the only full-fledged Islamic bank in this category.

The central bank has put DIB in the same bucket as ADCB. The two other systemically important financial institutions are the much bigger FAB and Emirates NBD.

BENEFIT FOR SMEs?

Ahmed and Howladar agree that banking consolidation is a boon for the regulator, with the latter saying that fewer but bigger banks are “easier to regulate versus many smaller ones”.

Given the complexities of a merger, it could take some time before clients could avail the full benefits, said Ahmed.

However, their opinions differ when asked if any merger would benefit small and medium-sized enterprises (SMEs), which constitute the vast majority of companies driving the UAE’s Islamic economy.

“Globally, and this region is not different, SMEs and start-ups have difficulty accessing credit as the related risk profile does not make it a segment which financial institutions focus on especially in periods of slower economic growth,” said Ahmed.

“Having said that, it would be fair to say that larger institutions are better positioned to provide a wider array of non-credit-related banking services so this will certainly assist the SMEs and start-ups,” he added.

Howladar believes smaller banks and finance companies are in a better position than bigger banks to serve SMEs and start-ups.

“Bigger banks have bigger ambitions, capital bases, lending capacity and perhaps a lower tolerance for risk,” he said.

“Unlike more mature markets, the performance of SMEs is perhaps less statistically predictable and credit scoring/rating agencies (like Al Etihad) are crucial to the segment but are still young in the region,” added Howladar.

To better serve the SME and start-up demographics, Howladar points to fintech as having the potential to make a difference.

“This is where the big banks have the edge given the very high development costs involved. Partnerships with fintechs is also a practical approach.”

(Reporting by Emmy Abdul Alim; Editing by Seban Scaria [email protected])

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