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.


Apple’s Cook to China: keep opening for sake of global economy

Updated 23 March 2019
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Apple’s Cook to China: keep opening for sake of global economy

  • Cook’s comments come as Apple weathers sinking sales in China
  • Despite official pledges and repeated assurances that China would continue to open its markets

BEIJING: Apple chief executive Tim Cook nudged China on Saturday to open up and said the future would depend on global collaboration, as the United States and China remained locked in a bitter trade dispute.
“We encourage China to continue to open up, we see that as essential, not only for China to reach its full potential, but for the global economy to thrive,” Cook said at a China Development Forum in Beijing.
Despite official pledges and repeated assurances that China would continue to open its markets, some analysts worry that its reform project has slowed or even stalled under President Xi Jinping, who has sought greater control over the economy and a bigger role for state-owned firms at the expense of the private sector.
Cook’s comments come as Apple weathers sinking sales in China because of a contracting smartphone market, increasing pressure from Chinese rivals, and slowing upgrade cycles. The company reported a revenue drop of 26 percent in the greater China region during the quarter ending in December.
Before those results came out, in a January letter to investors, Cook blamed the company’s poor China performance on trade tension between the United States and China, suggesting that pressure on the economy was hurting sales in China.