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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 Arabia’s 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

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Copyright © 2008 Gallup, Inc. All rights reserved.

Inc. Source – Company Financials. All rights reserved. Global Research .Money Supply of GCC Financial Sector from 2009-2010 4 Copyright © 2008 Gallup.

Inc.Deposits of GCC Financial Sector from 2009-2010 5 Copyright © 2008 Gallup. Source – Company Financials. All rights reserved. Global Research .

Loans of GCC Financial Sector from 2009-2010 6 Copyright © 2008 Gallup. Global Research . All rights reserved. Source – Company Financials. Inc.

Source – Company Financials. All rights reserved.Liquidity (Loans/Deposits ratio) of GCC Financial Sector from 2009-2010 7 Copyright © 2008 Gallup. Inc. Global Research .

Inc. All rights reserved.The Major Highlights from 2009-2010       Kuwait and the UAE had negative GDP growth in 2009 Kuwait’s 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 8 Copyright © 2008 Gallup. .

and Authors’ estimates Source: Haver Analytics. Inc. by far the highest percentage GDP growth in the GCC between 2009 and 2011 Saudi Region Arabia UAE Qatar Kuwait Bahrain 9 Oman Copyright © 2008 Gallup. Source: Kamco Research. and is expected to have. SHUAA Capital Research .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. All rights reserved.

Inc. . All rights reserved.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. Sources: Country authorities and IMF staff estimates.

the UAE and Saudi Arabia. borrowed considerable amounts of money through external sources 11 Copyright © 2008 Gallup. . primarily Bahrain. All rights reserved. Inc. Includes foreign currency interbank lending extended by foreign bank branches in GCC countries.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. Source: BIS Consolidated Banking Statistics.

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 Qatar’s 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 Copyright © 2008 Gallup.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. All rights reserved. Inc.

Source: National Bank of Kuwait: GCC Economic Outlook . Inc.Outlook on the GCC – Real GDP. Crude Oil Output & Consumer Price Inflation 13 Copyright © 2008 Gallup. All rights reserved.

All rights reserved. 2011) The impact of the recession on the GCC’s 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 Copyright © 2008 Gallup. .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 country’s 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. Inc.

How Important is Customer Service in Banking? .

Inc. Source: AT Kearney. All rights reserved. GCC Banks: On the Road to Maturity . 2008 Gallup.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.

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. Source: AT Kearney: More than Just Lip Service . All rights reserved. Inc.AT Kearney – Customer Satisfaction Increases Retention. 2008 Gallup.

Inc. Source: Booz Allen Hamilton: Striving for Growth – Best Practices in Retail Banking Sales and Service Channels . All rights reserved. 2008 Gallup.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 bank’s 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.

Inc. All rights reserved.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. Source: Ernst & Young: Retail Banking in the GCC .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.

The Background on the UAE .

6 billion respectively Low domestic growth leading to increasing competition amongst domestic banks looking to grow by taking each other’s 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. . 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.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).25 billion and AED 6. All rights reserved.

Bankers’ Almanac. All rights reserved. Source: Bankscope.Ownership of the UAE Banking Sector in 2007 (%) 22 Copyright © 2008 Gallup. Inc. and IMF staff .

UAE – Foreign Debt from Loans Taken 23 Copyright © 2008 Gallup. Inc. All rights reserved. and IMF staff estimates. Dealogic. Sources: JEDH. .

All rights reserved.Money and Finance in the UAE Money Supply Commercial Bank Assets Bank Claims (Private Sector) Policy Interest Rates 24 Copyright © 2008 Gallup. Source: National Bank of Kuwait: GCC Economic Outlook . Inc.

Source: National Bank of Kuwait: GCC Economic Outlook and banks' annual and quarterly reports from Zawya.Exchange Rates. and Fund staff estimates . 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.

Country authorities. All rights reserved.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. and authors' estimates. . Note: Construction includes both residential and commercial. Inc. Source: IMF Working Paper.

Dubai Holding. Inc. .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. All rights reserved. 2008) 27 Copyright © 2008 Gallup. 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.

226 1.619.526 3.420.508 3.523 122 14.657 1.746 726.2 7.836 3.6 3.6 3.651.345.262 13.020 8. Inc.160.358.7 11.602.538.983.345 201 13.889 6.645 2.924 Dubai Islamic Bank 5.9 Mashreq 7.751 25.797.001 12.019 7.778 1.262.637 3.291.1 11.2 31.771 6.207.141 1.948 Bank Union National Bank RAKBANK Overall share of Revenue (%) Net Profit Margin (%) 45.500.149 1.310.827 8.135 266.002.105.5 40.9 39.4 77.233.425 (0.937 2.491 806.0 9.159 (12.1 381.9 National Bank of Abu Dhabi First Gulf Bank Abu Dhabi Commercial Bank Abu Dhabi Islamic Bank 28 Copyright © 2008 Gallup.7 12.335 (559.175 9.478 4.Financials of Major Banks in the UAE (2009-2010) Comparisons of Year-on-Year Averages Bank Name Emirates NBD 2009 Revenue (AED’000) 2010 Revenue (AED’000) 2009 Net Profit (AED’000) 2010 Net Profit (AED’000) Change in Revenue (%) 14.364.683.434 13.0 4.616 260.186.023.477 Emirates Islamic 3.855 1.575.8 Sharjah Islamic Bank 884.225 10.43) 10.4 4.706 130.250.3 1.992 3.3 37.9 16.339.019.9 2.000.4 17.498 (19.6 4.83 5.794 61.498.5 5.313.7) 7.340 2.530.7 11.9 10.111. Source: Zawya .782. All rights reserved.464 803.409 152 2.9) 8.448) 3.051.

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.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. Inc.4% of its revenue ENBD. All rights reserved. .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 Bank’s (EIB) net profit is only 1.8% and 31.43% ADCB came back from a sizeable net loss in 2009 to a net profit in 2010 29 Copyright © 2008 Gallup.

Source: National Bank of Kuwait: GCC Economic Outlook . Crude Oil Output & Consumer Price Inflation 30 Copyright © 2008 Gallup. Inc.Macro Forecasts of the UAE – Real GDP. All rights reserved.

Note: Several figures used from National Bank of Kuwait: GCC Economic Outlook . All rights reserved.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 country’s 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.

“GCC Banking. 2010.” Hassan. 2010. Booz Allen Hamilton. All rights reserved.. International Monetary Fund). Konik. Madha.References           National Bank of Kuwait Capital. and S. 2011.” Bennie. Banks Rebalancing Recommendations. A.. M. “Retail Banking in the GCC: Competing for Customers”. March 2011. and C. Global Investment House.. N. Moss. “UAE Banking Sector. Senhadji. Jaffery. F. Qoussous. Oulidi. F.. International Monetary Fund Working Paper WP/10/87. 32 Copyright © 2008 Gallup.” R.. A. Inc. Gemes. (Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update). “Striving for Growth: Best Practices in Retail Banking Sales and Service Channels”. K. Shuaa Capital.. Rasmala. (The GCC Banking Sector: Topography and Analysis). National Bank of Kuwait. A. 2007. 2011. Ernst & Young. Haque. December 2010.. International Monetary Fund. GCC: 2011 Macro Outlook . March 2011. 2010. G. Khamis. . “GCC Economic Outlook. Khamis. M.

International Monetary Fund. GCC: 2011 Macro Outlook . 2010. M. and S.. Reeve. “The UAE Economy: Sustainable in the Face of a Serious Global Recession ”. All rights reserved. Ahmed.com/getarticle.php http://www. March 2011.com/index. T. Jaffery. 2009. “GCC Banking. “GCC Economic Outlook. National Bank of Kuwait. R. “Retail Banking in the GCC: Competing for Customers”. Inc.gov/ipc/www/idb/rank. . Shuaa Capital. Agha..executive-magazine.php/Publications/middle-east-banking-market-t he-2011-outlook.” Bennie.. (Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update). Khamis. H. 2011. A. Haque. Samba Financial Group. K. and J.html 33 Copyright © 2008 Gallup.References           Handy.census.” http://www. K. Senhadji. Global Investment House.. International Monetary Fund). A.. G.. March 2011. Qoussous. Ernst & Young.atkearney. Gilmour. 2011.. Savard.. F.php?article=12302 http://www.

.thenational.aspx?newsId=43845&language=en  http://www.com/NewsDetails.emirates247.370380 34 Copyright © 2008 Gallup.com/business/economy-finance/banks-face-customer-e xodus-over-services-2011-03-20-1. Inc. All rights reserved.kamconline.References  http://www.ae/business/bank-customers-unhappy-with-service  http://www.