Small UAE lenders to merge amid regulatory pressure

Mergers in the UAE banking sector are likely to accelerate because of a slowing economy and a slide in property prices with smaller banks bearing the brunt of the downturn. (Reuters)
Updated 08 January 2019
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Small UAE lenders to merge amid regulatory pressure

  • Authorities tighten the screws on smaller banks to strengthen balance sheets after bailout
  • Analysts expect mergers in the sector to accelerate given a slowing economy, a slide in house prices, robust accounting standards and tougher competition

DUBAI: Smaller banks in the UAE are facing regulatory pressure to merge after the fallout from a property downturn forced the state to lead a bailout of Invest Bank last month.
The UAE has 50 commercial banks including 22 local lenders, a number seen as too high in a country of about 9.5 million people. Saudi Arabia, which has a population of 32 million, has 12 banks and is set to lose two of those if announced mergers are successfully concluded.
After two of the UAE’s biggest lenders, First Gulf Bank and National Bank of Abu Dhabi, merged in 2017 to become First Abu Dhabi Bank, three more lenders are in talks to combine, led by Abu Dhabi Commercial Bank.
Analysts expect mergers in the sector to accelerate given a slowing economy, a slide in house prices, robust accounting standards and tougher competition.
“There will be pressure on the bigger banks to absorb smaller lenders,” said Sabah Al-Binali, CEO of Abu Dhabi-based investment firm Universal Strategy.
“People were expecting mergers from an economic point of view, but what you are seeing now is perhaps a greater regulatory push to strengthen balance sheets.”
Smaller banks in the UAE, which are mostly family owned, have lost market share to the top four lenders, which now control around 65 percent of banking sector loans, according to Fitch. Despite that, their owners have resisted mergers, partly due to differences over who would control the combined entity.

 

But one banker, who has been advising banks on M&A, said there are more merger conversations happening in a sign that owners are becoming more open to consolidation.
“We are party to a number of such conversations and instigating a number of those,” the banker said.
In 2009, the UAE rescued its largest banks with billions of dollars of fresh equity without forcing losses on shareholders.
Nine years on, with those lenders well capitalized, authorities are tightening the screws on smaller banks, but without the generosity shown to the larger players.
The Sharjah government proposed to buy Invest Bank shares for just 0.70 dirhams ($0.19) each, against the last traded price of 2.40 dirhams, after the central bank ordered it to take losses that wiped out its capital base.
“The central bank has become much more involved with all of the banks in ensuring (they) have a sustainable business model,” said the banker.
A second banker said the central bank had been monitoring distressed assets and challenging banks on their classification assumptions for such assets, especially in the real estate sector.
The central bank did not respond to a request for comment.
Mik Kabeya, assistant vice president at rating agency Moody’s, said smaller banks tended to have higher exposure to small and mid-sized corporates, which have been disproportionately affected by the relatively soft economy.
He added that there was a need for scale to meet sizeable investment requirements related to compliance, digitalization and new accounting standards.

FASTFACTS

The UAE has 50 commercial banks, including 22 local lenders.


World leaders prepare for Davos amid gloomy forecasts

Klaus Schwab, founder and executive chairman of the World Economic Forum. (AFP)
Updated 16 January 2019
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World leaders prepare for Davos amid gloomy forecasts

  • Delegates to annual forum to include presidents of Iraq and Afghanistan

DUBAI: World leaders are preparing to head to the annual meeting of the World Economic Forum (WEF) in Davos, Switzerland, amid the riskiest global backdrop in years, according to a report from the event organizer itself.

As the WEF announced the names of some of the 3,000 participants set to attend the meeting and details of the four-day agenda, it also published a gloomy outlook on international politics, economics, the environment and technology. 

Rising geopolitical and geo-economic tensions are the most urgent risks in 2019, with 90 percent of experts surveyed expecting further economic confrontation between major powers, according to the WEF’s annual Global Risks Report.

“The world’s ability to foster collective action in the face of urgent major crises has reached crisis levels, with worsening international relations hindering action across a growing array of serious challenges. Meanwhile, a darkening economic outlook, in part caused by geopolitical tensions, looks set to further reduce the potential for international cooperation in 2019,” it added.

Although political and economic worries were top of the immediate agenda for the 1,000 experts polled by the WEF, the environment and climate change are also a cause for concern, as are “rapidly evolving” cyber and technological threats, the WEF said.

Børge Brende, the WEF president, said: “With global trade and economic growth at risk in 2019, there is a more urgent need than ever to renew the architecture of international cooperation. We simply do not have the gunpowder to deal with the kind of slowdown that current dynamics might lead us toward. What we need now is coordinated, concerted action to sustain growth and to tackle the grave threats facing our world today.”

The leaders who will begin to arrive in Switzerland in the next week include Shinzo Abe, prime minister of Japan; Jair Bolsonaro, president of Brazil; Angela Merkel, chancellor of Germany; and Wang Qishan, vice president of China.

With US President Donald Trump pulling out of the meeting to deal with the partial government shutdown, the American delegation is expected to be led by Steven Mnuchin, Treasury secretary, and Mike Pompeo, secretary of state.

The Middle East is well represented at the meeting, with at least nine heads of state or government from the region, including Palestine, Iraq, Egypt, Jordan and Lebanon. Saudi Arabia will be represented by a team of senior policymakers and business leaders.

The risk report will give them all food for thought in the Alpine resort.

Asking whether the world is “sleepwalking into a crisis,” the report responded: “Global risks are intensifying but the collective will to tackle them appears to be lacking. Instead, divisions are hardening. The world’s move into a new phase of strongly state-centered politics continued throughout 2018.

“The idea of ‘taking back control’ — whether domestically from political rivals or externally from multilateral or supranational organizations — resonates across many countries and many issues.”

Macro-economic risks have moved into sharper focus, it said. 

“Financial market volatility increased and the headwinds facing the global economy intensified. The rate of global growth appears to have peaked,” the report said, pointing to a slowdown in growth forecasts for China as well as high levels of global debt — at 225 percent of global gross domestic product (GDP), significantly higher than before the financial crisis 10 years ago.

Raising the prospect of a “climate catastrophe,” the report said extreme weather, which many experts attribute to rapid climate change, was a risk of great concern. “The results of climate inaction are becoming increasingly clear,’ the WEF said.

Of the 3,000 participants at Davos, which runs from Jan. 22 to 25, around 78 percent are men, with an average age of 54. 

The oldest will be the 92-year-old British broadcaster David Attenborough, the youngest 16-year-old South African wildlife photographer Skye Meaker.