The UAE is the second largest economy in the Arab world after Saudi Arabia. This may have something to do with the fact that Dubai’s International Financial Centre is home to 21 of the world’s top 25 banks, 11 of the top 20 money managers, six of the world’s 10 largest insurers, and six of the 10 top law firms. This financial hub is responsible for connecting the region’s emerging markets with those in Europe, Asia and the US.

All this talent helps make the UAE banking sector the biggest in the Arab world. In 2015, the country as a whole is expected to outperform all the other GCC member states. It has been bolstered by a strengthening economy and the successful resolution of several key risks, including the restructuring of Dubai’s debt, and reduced fears of a housing bubble after the introduction of tighter regulations on the real estate sector by the UAE Central Bank last year.

While the entire GCC banking system remains sound, profitable and well capitalised, UAE banks have emerged as one of the top performers within the alliance. Total assets of GCC banks grew by 10.4 percent to $1.2trn in 2014. By comparison, UAE banks witnessed stronger growth in total assets, up 18 percent, reflecting a higher contribution to total GCC assets.

The decision by the country’s banking industry to focus on raising non-interest income clearly paid dividends in 2014 and the sector is expected to reap similar rewards this year. While GCC banks have increased their non-interest income by 15 percent in 2014 compared to the previous year, UAE banks recorded a very strong growth of 30 percent – yet another indicator of the country’s contribution to the region.

“Dubai’s success at diversifying its economy and expanding its global reach makes it less vulnerable to oil price fluctuations and a boost in business activity is expected in the next few years”, said Mohammad Nasr Abdeen, the CEO of Union National Bank (UNB). “Non-oil growth will accelerate as infrastructure spending rises in the run-up to Dubai 2020 Expo.

“A strong dollar, to which the UAE currency is pegged, has helped cushion the impact of the fall in crude price and expansion of the non-oil sector is emerging as the key driver, which will help overall GDP growth in 2015.”

On top of all this, the long-term political stability the UAE has enjoyed means more companies, especially from the Arab world, are relocating their headquarters to Dubai. In 2014, foreign direct investment grew 25 percent, contributing five percent of the UAE’s GDP. This growth has boosted businesses across all sectors, strengthening the banking sector’s credit activities. In short, life looks good for bankers in the UAE.

The up and up
UAE banks are definitely in a healthier state than they were five years ago. The operational environment has stabilised, with Western economies’ forecasts improving the growth of tourism and trade in the country. Loan demand and loan quality continue to improve, providing growth and stability to the UAE banks, which are strongly capitalised compared to other MENA banks (meaning they are adequately positioned to finance projects the country requires in order to grow).

In fact, bank loans and liquidity ratios are increasing, and non-performing loans are decreasing. Total assets of banks operating in the UAE have increased 8.2 percent between Q2 2014 and Q2 this year, reaching AED 2.42trn by the end of June. By 2019, total assets in the commercial banking sector are estimated to hit AED 3.54trn (see Fig. 1). Total deposits of customers also increased by 3.1 percent, reaching AED 1.44trn at the end of Q2 2015.

Not only that, but aggregate capital and reserves of banks operating in the UAE have increased from AED 287.2bn Q2 2014 to AED 311bn at the end of the same period in 2015, while banks’ capital adequacy ratio remained well above the 12 percent prescribed by central bank regulations.

Profit growth for UAE banks is also on the up. Banks in the country are expected to report a 20 percent net profit for 2015. The loan-to-deposit ratio fell to 100 percent in 2010, 94 percent in 2012 and currently sits at around 90 percent. Overall liquidity is improving as more FDI flows into the country and customers are repaying their loans. Corporates are also performing better and many, including UNB, are helping to support the development of their country by focusing on corporate social responsibility and embedding it into the bank’s vision for the future.

“Over the years, UNB has consistently played an important and active role as a responsible corporate citizen in the development of the local and international community by supporting various CSR initiatives and projects in different categories, such as education, emiratisation, community causes, special needs, climate change and the environment”, said Abdeen. “As a testament to its commitment and development to CSR, UNB has recently become the first bank to be verified to follow the guidelines of ISO 26000 (Social Responsibility) by Lloyd’s Register Quality Assurance.”

Customer first
Customer service remains a key challenge for banks in the UAE, but a lot of effort is being directed to addressing this issue. This includes greater use of customer relationship management, and the implementation of technology in making banking easier for customers. Moreover, availability of good talent within the industry remains a challenge, especially when the banks plan to embark on growth outside the UAE.

“The UNB Group continues to invest in technology and infrastructure for the provision of technologically advanced and secured services to its customers”, said Abdeen. “During the year 2014, the core banking solution available across the Group entities was extended to the overseas branches in Kuwait and Qatar.

“The bank continues its efforts to support the corporate and retail business through its innovative product offerings and its commitment to provide superior customer service. UNB has been growing its franchise, especially in areas like SMEs, Islamic financing, brokerage services, structured finance and private banking.”

Although UAE banks are well poised as far as regulatory compliance is concerned, the upcoming implementation of the Basel III regulatory framework on bank capital adequacy, stress testing and market liquidity risk could be a challenge. UAE banks could face a tougher operating environment in the coming years due to dwindling global oil markets – more so if the oil prices do not improve.

Looking forward
The UAE’s Islamic banking sector is forecast to expand significantly in the coming years, and the country is expected to cement its position as the regional hub within the Middle East. By further incentivising UAE companies to utilise Islamic debt instruments, the country should also attract issuers from elsewhere in the Gulf. Moreover, government support for Islamic banking is likely as the country aims to reduce its dependence on hydrocarbons, particularly given the drop in oil prices since June 2014.

Looking beyond 2015, the UAE has significant growth opportunities. Despite the relatively well-established banking sector, the number of bank branches relative to the size of the population is one of the lowest in the region. Only 59 percent of the population aged above 15 has an account at a formal financial institution; that is lower than regional peers Bahrain (64 percent), Qatar (65 percent), Oman (73 percent) and Kuwait (87 percent).

This presents a good opportunity for branch expansion of banks across the country. Lending to the government (which has largely been closed to foreign banks) is large and is expected to grow, even if at a more measured pace. This means UAE banks have an opportunity to further improve their efficiency by focusing on areas such as digitalisation, which many western peers are already on board with.

“UNB’s strategies focus on providing best customer service, nurturing our employees, being innovative, maintaining financial solidity and growing shareholder value”, said Abdeen. “The Abu Dhabi Economic Vision 2030 sets targets outlining the intended strategy for economic development, identifying key resources to be developed and core policy reforms to be implemented. UNB is committed to continue to contribute and support the growth of the UAE economy in its journey to make UAE among the best countries in the world.”