First Abu Dhabi Bank PJSC and Emirates NBD Bank PJSC, the two biggest banks in the United Arab Emirates, are pursuing opportunities in the wider region amid sluggish growth at home.
The strategies were in place before the coronavirus pandemic hit the global economy and before the oil price dropped when Saudi Arabia slashed prices in early March.
Moves abroad bring many benefits, such as diversified loan books and reduced exposure to oil prices, analysts said. Emirates NBD's acquisition of Turkey's DenizBank AŞ, finalized in summer 2019, added 87 billion United Arab Emirates dirhams to its loan book, and reduced its concentration of loans in the UAE from 93% at the end of 2018 to 75% as of Dec. 31, 2019.
The Dubai-based lender and FAB have both identified Saudi Arabia as a growth market. And further expansion could be in the wind: FAB has said it is in discussions with Bank Audi SAL in Lebanon to acquire its subsidiary in Egypt. FAB already has a branch network in Egypt, along with a handful of other UAE banks including Emirates NBD and Mashreqbank PSC, but an acquisition would allow it to scale up its presence there, said one analyst who declined to be named.
"There are limitations to how fast you can grow organically in overseas markets," he said.
Overseas expansions carry a number risks, including currency risks, dealing with multiple regulatory jurisdictions, and higher costs, while cultural mismatch is another a frequent reason for failure of cross-border mergers, he said. "A business strategy that works in the UAE will not necessarily work in Turkey or the Egypt," the analyst said.
Political risks are also present, given the fractious nature of the region, though in previous situations, such as the boycott of Qatar, this has not always directly impacted all banks, he said.
Following trade
One of the key motivations for UAE banks to establish a presence in international markets is to support local clients, following major trade flows to and from the UAE, especially in corporate and investment banking, said Emilio Pera, partner and head of audit and financial services at KPMG Lower Gulf.
"In addition, where there is an opportunity to expand into other regional markets with strong growth potential, through acquisition, it will be considered on a case-by-case basis," he said.
"Although some specific acquisitions have been made, the general trend has been the consolidation of international operations," said Pera.
Abu Dhabi Commercial Bank PJSC, the UAE's third-largest bank by assets, announced it would concentrate on the domestic market only, selling off a business unit in India, following its acquisition of Union National Bank.
Government relationships
Emirates NBD and FAB have close economic relations with the governments in their respective home emirates, the country's two largest in terms of economy, though there are marked differences in economic strength, given the large oil and gas revenues enjoyed by Abu Dhabi versus Dubai's highly leveraged growth.
For FAB, government and public-sector loans make up around 26% of its total loan book and 47% of deposits, according to a December 2019 report from S&P Global Ratings. Its loan book also has "a good degree of geographic diversification," with 26% of net loans outside the UAE, said the report.
Emirates NBD's single borrower concentration remains the highest among UAE peers, despite the impact of the DenizBank acquisition on diversifying its loan exposures, according to a January report from Fitch Ratings. "[L]arge exposures include a significant share of loans to the heavily indebted Dubai government and its government-related entities," with total exposure to the sovereign Dubai representing 42% of gross loans.
The DenizBank acquisition provides the bank with economic diversification, given that key dynamics in Turkey are countercyclical to the UAE. "We are oil producers, they are oil importers, we've seen in the interest rates cycle also they benefit from lower rates," said Surya Subramanian, Emirates NBD's outgoing group CFO, on an earnings call in January.
However, the acquisition has added risk to its loan book, with analysts on the call questioning whether the bank's nonperforming loans had increased at a faster clip than other Turkish banks. NPLs for the Emirates NBD group, including DenizBank, stood at 5.6% at the end of 2019, compared with 4.8% at the end of the third quarter of 2019. Stage 2 loans also increased significantly. During 2019, Emirates NBD's total stage 2 loans increased to 20.3 billion dirhams from 9.4 billion dirhams .
Saudi Arabia beckons
With Saudi Arabia having the largest population and economy in the GCC, both FAB and Emirates NBD see opportunities there, and currently are among only a handful of foreign banks operating multiple branches within the kingdom.
However, foreign banks may be restricted to segments such as corporate banking or high net worth client, said Pritish Devassy, vice president and head of equity research at Al Rajhi Capital. "It will not be so easy for new banks to come in. For example, most banks require income coming into an account when offering a product such as a car loan. There are some barriers for entry that will make it difficult for foreign banks to eat into the larger [retail] segment."
FAB's current business in Saudi remains predominantly corporate and investment banking, CFO James Burdett said on a January call with analysts, noting that they were "the only bank in the UAE on the Aramco IPO."
When it comes to competing in the retail space, "we know we can't [grow there] with bricks and mortar and we are looking to use our digital proposition there and see how it goes. But it is very, very much in its infancy," he said.
As of March 23, US$1 was equivalent to 3.67 United Arab Emirates dirhams.