Peer Analysis on UAE Banks

With 2014 results just round the corner, with some banks having already announced the unaudited numbers, I feel this is the right time to take a peek into a peer comparison for some large names. Although some numbers are yet to be out, and waiting couple of weeks more would have given me more room to manoeuvre, just couldn't resist the temptation.

I've taken ENBD (for obvious reasons), ADCB, FGB and Mashreq. For others, numbers are not yet out, and I believe these names forms a good sample of the larger population. So here goes..

So, how to go about this? I've highlighted in table above some of the major numbers/ratios that stands out. I've decided to go through major parameters, that will define a Bank's positioning.

1. Total Assets - Yes, size does matter. It gives the bargaining power, economies of scale and more importantly market share. ENBD is the banking behemoth - the undisputed king when it comes to asset size. With AED 363 Bn of total assets, it leads the pack comfortably. ADCB crossed 200bn mark for the first time with its 2014 results.

2. The Loan to Deposit Ratio: Although disguised as an asset ratio, this is essentially a liquidity ratio, showing where your funding source is blocked. A ratio of 100% or above shows that you have invested all your deposits in loan book, and if some contingency comes in, you have to depend on perception based funding lines, like your other bank limits. If perception goes bad in the market, coupled with a contingency arising, it will be a double blow. HSBC had its ratio somewhere close to 80%, and Stuart Gulliver was always happy about it. In this pack, FGB and Mashreq is comfortable with 91% and 84%, while the larger peers doesn't seem to bother with this one ratio. Especially in UAE markets, where capital ratios are much above regulatory levels, such risk taking is possible. You may not see this elsewhere.  With such high Capital levels, that essentially goes into funding your loan book to some extent.

3. Non core liability to total assets - An extension of what was discussed above. How much of your assets is funded by liabilities other than customer deposits. ENBD and ADCB is at a higher side of this ratio here, with lower the better being the reasoning.

4. Percentage of NPLs to gross loans - Globally, 2% or lower is considered a good ratio. The sample we are looking to here, doesn't show such a good picture. But as I said before, capital ratios are so good, this is still manageable. Also, provisioning is good. The resulting credit risk is adequately covered by capital available. With ratio close to 8%, ENBD in a way reflects the overall UAE Banking Industry, which peaked at an 8.4% NPL ratio in 2013.

5. % of NPLs to equity + provisions - More than 30% considered bad. The ratio is looking into how much equity and provisions you hold against your bad loans. With larger size, comes larger problems. ENBD is towards the bad end to all these ratios.

6. Provision Coverage ratio - Self explanatory - do you have enough provisions to cover your NPL? FGB seems to be lagging a bit here, but have improved substantially from 75% an year back in 9M'2013. A lower provisioning may mean that you will have to take a hit on your profits in future years substantially if things go bad.85%-90% is considered average for UAE market, as per CB. The provision coverage level is adequate given that NPLs do not result in full losses and do not take into account collateral held by banks.

7. Sovereign Exposure - For ENBD, this sort of explains their size. A whopping 43% of their loan book, belongs to Government undertakings. This is in a way good, as these assets comes with 0% asset weightage and hence your capital requirement is lower. But as history goes, when things go bad, its goes the worst way and Government exposures pose certain amount of risk. Ever heard of falling oil prices??

8. Capital Ratios - While CB asks for a 12% CAR and an 8% Tier 1 ratio, all the banks in this group, are well ahead of the requirement. All the banks follow this agenda. Why? A major reason is that as per CB instructions, you should keep a buffer to meet your pillar II risks (systemic, concentration, liquidity, legal etc). When BASEL III comes in, this excess buffer will help at that time as well. Also, risks arising from restructured loans are not captured in Pillar 1, so you better have a buffer.

9. Net profit to RWA - A three year average is a more accurate barometer, but I've just used the latest available number here. Net profit above 2% of your RWA is considered good globally, and all the banks in our group gets passmark comfortably.

10. Efficiency - So you have your interest cost, which is market driven. So what can you control? Your other costs. Non interest expense as a % of total income being less than 45% is globally considered good. Our list of banks show that UAE banks are very efficient indeed.


I've analysed just 10 parameters here, whereas I can do many numbers more. But to keep it sweet and simple, I believe 10 gives a good picture. Liquidity ratios are a bit shaky for these banks, while provisioning and capital ratios are very good. Profitability and efficiency levels are also very good. Capital ratio is the most important measure for Banks,  as capital is more important when a bank is in otherwise weak financial condition; when earnings are absent, it is a critical buffer for absorbing losses. So with strong CAR hovering near 20% mark, this peer analysis reveals a good picture for UAE banking sector.

PS: I have not gone into a stress test scenario. With oil prices going down things may get shaky. This post is only to present the picture, although I'll be updating the same as I get more insights.