MARKETS
UAE banking at a time of inflection In the current market landscape, with its challenges in connection with difficult macro conditions, growing gap between leaders and laggards, and the threat from platform businesses, many banks need to do something. Dr Gokhan Ozevin, Senior Principal in the Financial Institutions Practise of Kearney says that difficult macro conditions should not be an excuse to only focus on short-term measures
UAE—AN ATTRACTIVE BANKING MARKET WITH UNIQUE CHARACTERISTICS
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ost banking markets around the world have seen limited growth and profitability improvement in recent years. In contrast, despite the recent economic slowdown, UAE has been an attractive market from a growth and profitability standpoint and remains so. UAE banking income grew at a CAGR of five per cent between 2014 and 2018. Average annual RoE over the same period was 13 per cent. UAE banking is characterised by relatively higher risk costs and lower leverage which are offset by a high degree of cost efficiency and somewhat higher margins. Share staff costs in total costs remains very high. Corporate and GREs account for an unusually high share (approximately 70 per cent) of deposits and loans in the system, in line with the structure of the economy and concentration of income. Corporate loans, reflecting composition of the GDP, are
Dr Gokhan Ozevin
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BANKER MIDDLE EAST | MARCH 2020 | ISSUE 228
dominated by real estate and trade, with increasing yet limited diversification into manufacturing, transport and oil and gas. Deposits generate the lion’s share of risk-adjusted net interest income due to high risk costs associated with lending; high competitive pressure, negatively impacting pricing, and high share of current account and savings account in the deposit mix. Wining primary relationships in retail and transaction banking business in corporate are key for sustained profitability.
COMPETITIVE DYNAMICS CHANGING RAPIDLY Competitive dynamics is changing rapidly in the UAE market— top-end of the market has become much more concentrated after the major mergers over the past couple of years. While First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank, together account for more than 75 per cent of assets, rest of the market remains fragmented and overbanked—five banks with asset market shares between 2-7.5 per cent and 11 banks with less than two per cent. Growing pressure on mid-and small-size banks Impact of scale on performance becomes very visible the market is separated into three tiers based on asset market shares (Tier 1: > 5 per cent, Tier 2: 2-5 per cent, and Tier 3: <2 per cent asset market share in 2013). Although Tier-2 and Tier-3 banks managed to maintain their market shares so far, we observe a sizable profitability gap between Tier-1 banks and the rest. While Tier-1 banks delivered positive economic value added from 2013 to 2018, Tier-2 and Tier-3 banks struggled to pay back their cost of equity. Scale clearly matters, and gaps in digital as well as foundational capabilities contribute further to this profitability gap. We observe lesser productivity with Tier-2’s, and lesser productivity and lower risk-adjusted margins with Tier-3 banks. Gaps in scale, digital and foundational capabilities are likely to start a problematic competitive cycle for Tier-2 and Tier-3 banks. Investment pools required for customer innovation will be inadequate. Customer may accelerate defection to competitors with stronger balances sheets, more convenient and innovative offerings. In the absence of competitive value propositions, acquisition and retention levers may default to aggressive pricing and additional risk taking.
