Reuters Picture Archive

The Emirates NBD head office in Deira (REUTERS/Jumana El Heloueh)

Dubai banking outlook is much improved

The Oxford Analytica Daily Brief ® - Friday, February 15 2013

As the financial reports for 2012 become available, it is clear that there has been a significant improvement in the balance sheets of banks in Dubai. The negative impact of the property crash of 2008-09 is diminishing and asset quality is improving.



  • Local banks are starting to perform in a much more robust manner with increasing margins reflecting much stricter lending criteria.
  • It is evident that lessons have been learnt and the mistakes of the past are unlikely to be repeated in the medium-term.
  • For foreign banks with significant exposure to Dubai, the outlook is more problematic, as many loans from the boom period mature.
  • Much will depend on how the property market is faring during the 2014-15 period, when such loans fall due.

What next

Local banks in Dubai recorded solid performance in 2012 and the outlook is much improved, but many uncertainties persist. Less debt is due to mature in 2013 than subsequently, which gives a breathing space for Dubai's major companies to continue rebuilding their books.



The largest bank in Dubai, Emirates NBD, revealed results beyond expectations for 2012, which caused a one third rise in its share price in January. While there will be some profit taking, the longer-term share price outlook is now positive given the management strategy of the bank, which is to focus on retail business. The merger of Emirates Bank with National Bank of Dubai (NBD) in 2007 now appears vindicated, as well as timely, as the enlarged bank could more easily withstand the property crash.

Emirates NBD reach

Emirates NBD has become the largest retail bank in the United Arab Emirates (UAE), with branches nationwide, and has become the leading provider of personal finance and loans to small and medium-sized business. Although the National Bank of Abu Dhabi is larger in terms of assets, it is more dependent on government business. Emirates NBD is a conventional bank offering overdrafts and other standard interest based services, but in recent years it has established a significant presence in Islamic banking with sharia compliant deposits accounting for almost one fifth of total deposits. It is second only to Dubai Islamic Bank in providing sharia-compliant financial services in the UAE.

Emirates NBD recorded 3% growth in its annual net profit in 2012, although many analysts expected profits to fall due to the final absorption costs resulting from the merger with NBD:

  • Impairment costs resulting from bad debt from the real estate crash declined and the worst has clearly passed for provisions.
  • Customer loans increased 7% and deposits grew 11%.
  • Non-interest income jumped 25% as the bank successfully marketed more of its services to its broad base of depositors. A pick-up in trade finance activity also helped.

The latest financial results of Mashreq Bank, the second largest in Dubai, were in line with those of Emirates NBD. Profits rose substantially in 2012 as the need for further provisions declined, and its management is predicting a 10-15% increase in profits this year. This seems achievable.


2012 financial results of Emirates NDB and Mashreq Bank were very positive

Improving economic environment


The buoyancy of re-exports is encouraging for the banks in Dubai as they continue to be heavily involved in trade finance, especially import and export credits and letters of guarantee (see UNITED ARAB EMIRATES: Old strengths aid Dubai recovery - January 7, 2011):

  • Although sanctions on trade with Iran had a negative impact in 2012, and there is little chance of these being eased for the foreseeable future, buoyant re-exports to Saudi Arabia and Iraq more than made up for the Iranian shortfall.
  • Exports and re-exports rose by almost 9%, most financed by Dubai-based banks.
  • As Jebel Ali continues to expand as a transit hub and service centre for the region and beyond this will generate even more business for Dubai-based banks (see UNITED ARAB EMIRATES: Long-term outlook is positive - May 4, 2012).

Project finance and re-exports are likely to be buoyant this year

Project finance is likely to be buoyant, as during 2013 contracts worth over 159 billion dollars are expected to be awarded in the GCC states (see GULF STATES: Infrastructure spending drives growth - April 30, 2012). These include contracts for power, desalination, and petrochemicals. Although many of the projects are in Saudi Arabia and will be financed from Riyadh, there will be spin-off business for international banks operating out of Dubai, as well as local Dubai banks that can finance sub-contractors.

The Phase II expansion of the Emal Aluminium Smelting complex in the Khalifa Industrial Zone, half way between Dubai and Abu Dhabi, will generate lucrative business for banks in both Emirates. Emal is a joint venture between Dubai Aluminium and the Mubadala Investment Company of Abu Dhabi. Once completed in 2014 the plant will be the largest industrial venture in the UAE outside the oil and gas sector.

Regulatory issues

Apart from multinational banks operating out of the Dubai International Financial Centre (DIFC), all Dubai banks are regulated by the UAE Central Bank, which acts as lender of the last resort. The UAE Central Bank did not have to recapitalise any of the banks affected by the property crash, the 2009 bail-out being from the Abu Dhabi to the Dubai government. Nevertheless the Central Bank is taking pre-emptive action to avoid future crises.

In particular, a minimum loan-to-value ratio is being introduced for mortgages, with a cap of 70% for first time purchases by local nationals and 60% for second homes or buy to let. For foreign nationals resident in the UAE the caps are 50% and 40% respectively. As a result of the property crash, some foreign investors left the UAE and failed to honour their financial commitments, resulting in a significant burden for banks that could not easily recoup the money.

Debt maturity challenges


In 2014 and 2015 rescheduled loans of 8.4 and 7.9 billion dollars respectively will have to be repaid

During the property crash, priority was given to ensure bond and sukuk investors received their repayments promptly so that Dubai-based companies, such as Nakheel, could retain access to capital markets. However, this was at the expense of both local and international banks, which were forced to restructure over 22 billion dollars in loans at interest rates as low as 2%. The banks were unhappy about this, but did not want to drive Dubai's leading companies into bankruptcy -- which would have forced banks to make provisions for asset write-downs.

In 2014 and 2015 rescheduled loans of 8.4 and 7.9 billion dollars respectively will have to be repaid. If the banks are asked to provide new financing to pay off much of the existing debt it is unlikely that they will be prepared to offer terms as generous as those agreed for the earlier rescheduling. Much will depend on how the property market is faring. Although there has been recovery in prime locations, especially those near metro stations, prices are stagnant elsewhere.

Follow up

This article is drawn from the Oxford Analytica Daily Brief® which analyses the regional and global implications of key geopolitical, economic, social, business and industrial developments. It provides government, corporate and financial clients with timely, authoritative analysis every business day.

Learn more