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8th Global Conference on Business & Economics
ISBN : 978-0-9742114-5-9
Dynamics of the Merger of Emirates Bank International (EBI) and National Bank of Dubai
(NBD)-Strategic Challenges of Regional Consolidation
By
Dayanand Pandey & Sumit Mitra[i]
[i] Dr. Dayanand Pandey is the Head of Risk Management at Bank Melli Iran in Dubai, UAE. E-Mail: [email protected] Ph:
+971-4-2015245(D).
Dr. Sumit Mitra is Assistant Professor at the University of Wollongong in Dubai, UAE. E-Mail: [email protected],
Ph: +971-4-3672464.
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Dynamics of the Merger of Emirates Bank International (EBI) and National Bank of Dubai
(NBD) - Strategic Challenges of Regional Consolidation
ABSTRACT
Rapid strategic change is a necessity for most companies in these days of globalization, hyper competition, and
accelerated technological change. Accomplishing change through Merger & Acquisitions (M&A) appeals to a great
many managers. Banking industry is becoming an increasingly global industry, which knows no geographical and
territorial boundaries. The trend towards M&A in banking industry is affected by unprecedented growth in
competition, the continued liberalization of capital flows, the integration of national and regional financial markets,
financial innovations like Sovereign Wealth Funds (SWF), Basel II etc. Mergers & Acquisitions are mainly used as
a strategic option, as a means to an end.
On March 6, 2007, Emirates Bank International (EBI) and National Bank of Dubai (NBD) announced a government
approved merger creating one of the Middle East's largest banks with assets of more than US$ 55 billion, surpassing
the country's biggest lender - National Bank of Abu Dhabi. Aimed at enabling UAE to compete in global markets in
the face of its predicted Free Trade Agreements (FTA) with the US and other countries as well as the World Trade
Organization membership the merger complements EBI’s strong brand image and a large retail presence with
NBD’s edge in corporate banking.
In a largely over-banked and fragmented UAE market, its strategic plan highlights necessity of a strong and robust
banking sector, which can stand up to global competition. The Horizontal Merger of Emirates Bank International
and National Bank of Dubai has the potential to fulfill this desired outcome. While in the short to medium term, the
merger is expected to meet the synergistic benefits of revenue maximization, expense rationalization and optimality
in cost of capital, in the long term the strategic challenges arise out of regional consolidation of banks and increased
global competition.
I
INTRODUCTION:
Rapid strategic change is a necessity for most companies in these days of globalization, hyper
competition, and accelerated technological change. Accomplishing change through Merger &
Acquisitions (M&A) appeals to a great many managers. Banking industry is becoming an
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increasingly global industry, which knows no geographical and territorial boundaries. The trend
towards M&A in banking industry is affected by unprecedented growth in competition, the
continued liberalization of capital flows, the integration of national and regional financial
markets, financial innovations, Basel II etc. Mergers & Acquisitions are mainly used as a
strategic option, as a means to an end. The bank balance sheets in the gulf region are growing in
excess of 20% more than double the nominal GDP growth leading to strong revenue growth for
banks, according to EFG Hermes, a regional investment bank (Table-1). Banks as merged
entities can quickly gear up for the emerging situation in a sort time horizon according to the
head of Saudi Arabia’s National Commercial Bank (Gulf Today, June 2, 2007). Besides
providing the merged entity the size of assets and funds comparable to international banks, it
could provide reach by way of increased number of branches, broader customer base and even a
pool of internal staff talents that can meet increased demands in a short time (Gulf Today, May
8, 2007).
Emirates Bank International (EBI) and National Bank of Dubai (NBD) announced a government
approved merger creating one of the Middle East's largest banks in 2007. At the end of a year of
operations of the merged entity Emirates NBD Bank, the short term objectives of revenue
maximization and expense rationalization seem to be met (Table-2). However the long term
objectives of global competitiveness takes a new dimension with the increase in crude oil prices,
slowing down of world economy led by recessionary tendencies in the US economy. Together
with emergence of the Middle East (ME) economies as global investment destinations with
record petroleum prices, massive infrastructure, real estate, trade and tourism projects, this could
well indicate the emergence of the ME oil producing economies, particularly Dubai within UAE,
as one of the leading financial hubs of the world. In a survey conducted by IBM Institute for
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Business Values, Dubai ranked fourth among upcoming financial markets after Shanghai in
China, Mumbai in India and Hong Kong. This growth however is accompanied by sources of
concern regarding socio-political and regulatory environment (Ghosh, 2008).
II
BANKS IN UAE & PROJECT FINANCE
In the Middle East(ME), particularly United Arab Emirates(UAE), large projects of commercial
complexes, specialized clusters like Health city and Internet City besides reclamation of the sea
to set up residential islands, expansion of ports and creation of free trade zones together with
new, state of art airports at Jebel Ali and expansion of the largest airlines Emirates through
purchase of as many as 58 Airbus A380 aircrafts need large inflow of funds at competitive rates
and as per project schedules (Husain, 2008). Many such large funding in the past have been
syndicated loans made available in the past by the two largest international banks Standard
Chartered Bank Plc and HSBC Bank Plc operating in the region. The local governments need
opportunities for large funds to be made available for these projects at internationally
competitive rates over and above petrodollar earned from soaring crude oil prices and absorbed
locally. According to Middle East Economic Digest, project estimates to the tune of US$ 1.5
trillion (AED 5.5 trillion) were announced in the GCC until September 2007 (Gulf News’
Financial Review, May 2008, p24), had 44% of it in UAE. This size required additional
international sources of fund to be attracted over and above bank disbursement increases of AED
20.4 billion (2004-2006) for mortgages.
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IIa
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UAE Banking:
The UAE banking sector is the largest in the Gulf Cooperation Council (GCC) in terms of
banking assets. Total assets stood at US$335.6 billion in 2007 as compared to US$286.9 billion
recorded in Saudi Arabia thus making the contribution of UAE banks to aggregate GCC
(excluding Bahrain) figures at the end of 2007 at 40.5 percent with that of Saudi Arabia at 34.7
percent. At the end of third quarter 2007, the bulk of the assets continued to be held by national
banks of UAE (77.4%) while the rest was accounted for by foreign banking institutions.
However aggregate assets of foreign banks increased by 30.4% over the year as against an
increase of 22.1% by national banks (see Table-3 for bank performance). The national banks
have access to the UAE government surplus funds and face no restrictions on branch networks.
Foreign banks are restricted in the number of branches inducing them to focus on corporate
lending especially on big ticket projects (Gulf News’ Financial Review, May 2008, pg18).
Overall banking penetration in the GCC economies has increased on back of favorable
macroeconomic environment, buoyant energy prices and benign interest rates. The banks have
been on-shoring its own capital which in earlier cycles were off-shored in order to support
growth. Although in the past overseas markets have been tapped to raise capital as through Euro
Medium Term Note (EMTN) and other medium, current fallout of US ‘subprime’ forced local
ME banks to focus on further strengthening their deposit franchise locally. The deposits to GDP
ratio is highest for UAE standing at 105.6% in 2007 while the lowest is for Oman at 46.2%. The
EBI-NBD merger provided the asset base of the merged entity to participate in big ticket projects
and it also helped hedge against economic downturns when smaller banks found it difficult to
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compete with larger banks and still remain profitable (Gulf News’ Financial Review, May 2008,
p26).
However with an economic recession facing the rest of the world, many investment banks and
international Financial Institutions (FIs) would like to invest in the region. What is required is an
easy, legally and politically protected means of channeling these funds into the region. In spite of
bank mergers like EBI-NBD, size wise the opportunities in the region may not be suitably
leveraged by local banks whose size internationally are small with the biggest bank in the region
Abu Dhabi Commercial Bank ranked 194th in The Bankers Top 1000 Global Banks ranking.
Although the pretax profits of the 94 Middle East banks in the top 1000, including 16 of the
UAE in the list, increased by 30%, their combined profits did not match that of Citigroup (The
Banker, 2007). The combined entity Emirates NBD emerges as a leading regional financial
institution having branches in Kingdom of Saudi Arabia, Qatar, UK and Jersey USA besides
representative offices in India, Iran and Singapore with assets in excess of US$55 billion and
combined market capitalization of US$11.3 billion. However the limitations of size persists as
the combined assets of banks in the six GCC1 countries amount to US$ 624 billion which is only
60% of the size of Dutch bank ABN Amro which is itself a target for acquisition (The Gulf
Today, June 2, 2007) (Tables 3 &4).
Research has shown that post merger and subsequent consolidation, the size of the largest US
bank has grown relative the overall industry leading to the conclusion that such banks if given
scope for global cross border mergers would lead to global homogenization and efficiency
1
GCC or Gulf Cooperation Council comprises six countries namely Saudi Arabia, Kuwait, Oman, Qatar, Bahrain
and UAE.
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improvement of banking, dominated by efficient institutions (Agenor, 2001; Berger et.al., 2000).
In a region whose economy is growing and witnessing convergence of the global bigs in
banking, what then is the role and contribution of large size local banks like Emirates NBD other
than increased concentration in the banking industry?
IIb
Merger of the Emirates Bank International and National Bank of Dubai
The Emirates Bank International (EBI) and National Bank of Dubai (NBD) announced their
merger in March 2007 to create Emirates NBD Bank. With assets to the tune of AED2 165
billion the merged entities assets were AED 65 billion higher than the largest bank in the country
National Bank of Abu Dhabi. The reasons cited for the merger was to create an entity that could
play a major role in the region as also globally (The Gulf Today, 2007). Designated as a
horizontal merger, this was a merger of partners with complementary skills with EBI having a
strong brand name and retail presence whereas NBD had a strong corporate banking record. The
merged entity was to provide its combined customer base a complete and wider suite of financial
services. In its bid to be an exemplary merger in line with international financial sector norms,
investment firm Goldman Sachs was to act as exclusive joint adviser to both banks with Lehman
Brothers acting as ‘fairness opinion” adviser to EBI and Morgan Stanley similarly for NBD (The
Banker, 2007). As members of Dubai International Financial Center (DIFC), these international
banks express local interests and bring in transparency to the sector in the region.
Emirates NBD is 56% owned by the government of Dubai with total loan combined market share
of 21.7% (US$29.7 billion), having 99 branches and 429 Automated Teller Machines (ATMs) in
2
AED: Arab Emirates Dirham (currency of UAE, 3.67 AED = 1US$, pegged)
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the whole of UAE. Emirates Bank comes with its strong Islamic subsidiary as well, the Emirates
Islamic Bank. In justifying the increased size of the bank, its CEO commented ‘If you have oil
wealth why should this wealth be farmed out to others?” (The Banker, 2007). The merger is not
any cause of immediate threat of concentration in banking in the region and fears of monopoly
practices by the bank to the detriment of its customers because UAE is branded as over-banked
with 23 local and 28 foreign banks operating in the country. In explaining the benefits of large
banks it is also believed that increased costs of regulation including Basel II, Sarbanes-Oxley,
Anti Money Laundering legislation make it difficult for smaller banks to absorb the overheads
and continue competing as universal institutions. Together with scarcity of qualified manpower,
prohibitive cost of manpower often prevents small banks from achieving desired scales. A
pioneer in cross-border merger has been National Bank of Kuwait (NBK), the largest bank in
Kuwait that has successfully bought Egypt’s Al Watany Bank for US$ 516 m and acquired a
40% stake in Istanbul based Turkish Bank (The Banker, 2007).
Given that in USA, deregulation, removal of branching regulations were the reasons driving
mergers, together with benefits of technology and size (Moore and Siems, 1998), in the UAE the
former were not important under majority government ownership although bank mergers could
leverage on technology and size. The important concern here from a consumer point of view is a
loss in efficiency of banks and hence higher interest rates for lending and lower for borrowing
arising out of monopoly power of large merged banks. In the US the Clayton Act, the Justice
Department role using various measures of concentration ratio (like Herfindal Hirschman IndexHHI) are also protective mechanisms built into the governance of the banking industry. Does the
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commencement of merger process in the banking industry in the ME also call for strengthening
of its governance mechanism?
III
FINANCIAL NEEDS OF THE CORPORATE AND THE MERGER:
In their continued effort to diversify domestic economies away from oil dependence, GCC
countries have been investing in the growth of infrastructure including real estate, tourism, and
industrial development. Leading in these efforts are UAE where there is now shortage of
infrastructure like power supply. Countries like Saudi Arabia saw their non-oil sector as a
percentage of real GDP grow from 65 to 68% between 2000 and 2007. They have planned
setting up of seven strategic cities like the Medina Knowledge Economic City and King
Abdullah Economic City for a total estimated cost of 168 billion US$. Some of these are being
developed by UAE construction companies like Emaar and Nakheel. Considerable funding for
these projects is demanded. Together with projects in UAE like the new city plan in Ghantoot in
the border of Dubai covering 60 square Km and housing one million people and the Arabian
Canal project of builder Limitless besides Nakheel’s Dubai Waterfront all demand huge project
investments as well (Middle East Monitor, June 2008). International funders vied for these
projects given UAE’s score of 64.9 on 100 for Business Environment Rating and its place at 29
out of 170 countries in global ranking (Middle East Monitor, June, 2008). Accordingly UAE’s
external debts have soared to 58.4% of GDP in 2008 and expected to rise above 60% by 2009.
As a result UAE’s short term economic rating stood at 83.3 and its short term political rating fell
from 78.1 to 77.5 based on issues of social stability. Inflation figures were high to give CPI of
10% (y-o-y) by end of 2008 due to high food prices, ongoing tightness in the housing market and
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surging petrodollar liquidity (Middle East Monitor, June, 2008).
Forecasters are however
optimistic about a 6.5% plus average real GDP growth in UAE for 2008-2012 period. It is
imperative for UAE to maintain this growth momentum to sustain its attractiveness to expatriate
who form the bulk of its skilled and unskilled labor force. It is also needed to boost its evergrowing tourism sector as Abu Dhabi alone targets 2.7 million tourists annually by 2012 from
1.4 million currently requiring its hotel rooms to increase from 12000 to 25000 over the same
period.
Traditionally the primary sources of funding of projects have been bank finance, whether retail
or investment. But upturn in demand for professional long term investment banking is only
beginning to be visible in the Gulf according to Dr. Nahed Taher, CEO Gulf One Investment
Bank. According to her the new projects in real estate, utilities, transportation all require
specialized financial institutions and structured deals (Gulf News’ Financial Review, May, 2008,
p12). Despite high oil revenues accruing to Gulf governments, the GCC economies are facing
huge funding gaps. Estimated size of mega-infrastructure and energy project investments
required are to the tune of US$ 1.3 trillion (AED 4.77 trillion) by 2020. However the incremental
increase in GCC banks corporate loans is averaging US$ 10 billion annually resulting in a
liquidity gap of more than US$ 100 billion annually over the next 12 years, making it necessary
to attract international capital and debt to finance projects (Gulf News’ Financial Review, May,
2008, pg12).
A number of global investment firms and banks have been active in the Middle East. Explaining
the objectives of his division, David Law, Chairman Investment Banking Division, MENA
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region for Morgan Stanley observed ‘what we see here is a demand from clients for products and
services that have a local or regional characteristic, but with global expertise and distribution
ability”. Morgan Stanley was focused on providing client focused, locally and regionally tailored
products. According to Mr. Law, “from an international investor’s perspective, the Middle East
is the place on the radar screen of global institutional investors”. One of the roles Morgan
Stanley played was to bring companies from the region in face to face discussions with
institutions in the US and Europe as in the case of Dubai Financial Market and a number of listed
companies of local stock exchange (Gulf News’ Financial Review, May 2008, p18). For the
above opportunities, a number of international banks entered the region. Entry of global
investment banks like City, Goldman Sachs, and Lehman Brothers into the region has been
facilitated by the creation of the Dubai International Financial Centre (DIFC). Morgan Stanley
was the first global investment bank to open in the DIFC two years ago.
IIIa
DIFC: Dubai’s International Financial Hub
Created as an on-shore alternative with off-shore features, DIFC is meant to be a part of global
financial networks. Opened in September 2004, it emulates the financial markets of New York,
London and Hong Kong and is also geographically located in the middle of these markets in the
West and East respectively. Its remit is to create a regional capital market offering world class
regulation and standards of integrity, transparency and efficiency. Modeled as a Federal
Financial Free Zone, it attracts international investments by providing full foreign ownership of
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firms, no restriction on foreign exchange, capital or profit repatriation, a dollar denominated
environment, strict enforcement of money laundering laws and state of art technology, real estate
and other work environment. It provides a world class stock exchange-the Dubai International
Financial Exchange (DIFX) and focuses on sectors like banking (investment, corporate and
private), capital market (equity, debt, derivatives and commodity trading), asset management,
insurance and re-insurance as also Islamic finance and professional services. DIFC adopted, with
the assistance of international consultants PricewaterhouseCoopers, the best jurisdictions of
Europe, North America and Far East in its operations 3
Initiatives at DIFC and the resultant movement of large international financial investors to locate
operations in Dubai are likely to provide increasing options for structured banking products
customized for specific projects in the region besides giving liquidity and deep pockets leading
to a stable financial system for the region. According to the Governor of the Central bank of
UAE, domestic UAE banks lack investment banking capability due to their small size and ‘can
provide additional value from investment banking which we need in the UAE.” (The Banker,
2007). According to the head of investment banking division of Morgan Stanley, “ the banks that
are going to be around in five to 10 years time are those that can best match the needs of the
local client base- banks with scale, local and regional expertise, and most importantly global
reach” (Gulf News’ Financial Review, May 2008, p 19).
3
(www.difc.ae/;www.propertyportal.ae/dubai-international-financial-center.php;
www.pwc.com/extweb/pwcpublications.nsf/.)
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IIIb
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Recycling of Petrodollar and the Merger:
Why is this time different from that of the past? In the past during the two earlier oil shocks,
petrodollars from the ME region were invested in banks particularly US central bank as bills and
notes. Are these trends continuing? According to Saleh M. Nsouli (Nsouli, 2006), starting
around 1996, current account deficit in balance of payment has been building in major oilimporting countries led by the US. These current account imbalances have been on the increase
since the doubling of oil prices between 2002 and 2005 and then again between 2007 and 2008.
This has moved large sums of money from oil consuming to oil producing and exporting
economies. How these funds are then used by the oil producing countries identifies the
‘recycling of petrodollar” affecting global imbalances. A portion may be used by oil economies
to purchase foreign goods and services and another saved in foreign assets held abroad. The first
called ‘absorption channel’ refers to use of petrodollar for domestic consumption and
investments. The other called the “capital accounts channel’ is saved in foreign assets held
abroad thus resulting in capital account outflows. During the previous high oil prices episodes,
oil exporters also loaned part of their official reserves to the International Monetary Fund(IMF)
to finance the balance of payment needs of a number of non-oil exporting countries resulting
from the increase in oil prices, thus being "recycled" through the IMF. These increases in oil
prices in the 1970 and in the 2000s have been significant parts of local GDPs although not a
significant part of global GDP (see Table-5).
If oil exporters save their revenue, it may drain financial resources away from investment or
consumption in the oil-importing world, reducing their growth and employment prospects.
However, the oil-exporting countries would mitigate this impact to the extent that they place
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their petrodollars in any assets that result in a reflow of U.S. dollars into the United States, thus
limiting the impact on interest rates of the initial outflow of funds resulting from increased oil
prices. But what are oil exporters doing with the extra oil revenue? Given the large government
share in the oil sector in most oil-exporting countries, and thus in oil revenue, the deployment of
the additional oil income is mainly the decision of governments. In many cases, in particular in
the Middle East and Africa, governments have adopted conservative assumptions on the path of
oil prices in their budgets, much below market prices, and little of the excess revenue from oil
exports is estimated to have been spent. Indeed, many governments have been spending their oil
revenue carefully. A number of countries have been prudent, deciding to invest in social and
infrastructure projects, and in housing and education, as well as to repay foreign debt. So far, the
portion of oil exporters' revenue that has been spent has not played an important role in reducing
the United States' current account deficit. Oil exporters show a much lower tendency to import
from the United States than either developed economies or developing countries (Table-6). In
fact, oil exporters have turned into large buyers of goods from Asia, a region where they also
sell the bulk of their oil. This has mitigated the improvement in the trade surplus of oil-exporting
countries vis-à-vis Asian countries, which has been much less marked than the rise in oil
exporters' trade surplus vis-à-vis the United States.
Saleh M. Nsouli believed history suggested that it took time for oil exporters to adjust spending
to higher oil revenue. In the past high oil price episodes, oil exporters' imports continued to rise
years after oil prices had stopped increasing and even had started to decline. The lag in adjusting
expenditures observed in the past can be interpreted as a sign that oil exporters assumed a higher
permanent component in the price hikes than turned out to be the case ex post, and then found it
difficult to curtail spending when it became evident that the assumption of high oil prices was
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not well-founded. It remains to be seen whether any such low spending reflected well-learnt
lessons from the past, or reflected the time it took to devise and implement large spending plans.
A key question is whether oil exporters see the currently high level of oil prices as temporary or
permanent. It is, however, unclear in which region, currency, or assets oil revenue savings are
held. Central bank reserves in oil-exporting countries have increased some US$90 billion in
2005, but this accounted for less than a third of their combined current account surplus. In some
countries, like Russia, Saudi Arabia, and U.A.E., governments have given their oil revenue
surplus to newly-created, sophisticated investment agencies or oil stabilization funds, often the
sovereign wealth funds (SWF) to manage. These are subject to less stringent reporting
requirements than central banks, and their investments have been hard to track. There has also
been relatively little accumulation of petrodollars in bank deposits, in contrast to the experience
in the 1970s. Fuel-exporting countries' deposits in BIS-reporting banks amount to less than a
third of their cumulative current account surpluses. As noted by the BIS in its December 2005
report, a large proportion of petrodollars cannot be accounted for on the basis of counterparty
data.
It is also true that oil exporters face much broader investment opportunities for their savings
today than in the 1970s and 1980s. Local stock markets have developed tremendously and have
now the capacity to absorb large oil-related inflows. Returns on the Middle East stock markets,
for example, skyrocketed in the past year. The real estate boom taking place in the Middle East
provides additional new opportunities for local equity participation. To the extent that
government petrodollars have to be converted into domestic currency for local investment
purposes the dollars will end up in the central bank without directly affecting current account
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imbalances. However, the wealth effect of the rise in the value of local assets is likely to work
through the absorption channel to stimulate imports. But as evidenced by the small increase in
oil exporters' official reserves relative to their current account surpluses, a large share of the oil
revenue is being held as investment abroad. There is anecdotal evidence that local governmentowned companies have taken large stakes in private equity abroad. Dubai's stake in Daimler, in
the Tussaud Group in the UK, and, most recently, in P&O, Britain’s largest port and ferries
group, has been well reported in the press.
Oil-exporting countries with a high absorption capacity can rapidly recycle petrodollars through
domestic investment, with consequent current account flows, that would then be beneficial both
to their own development and that of their trading partners. Those with a low absorption
capacity, by contrast, may only afford a gradual increase in spending, while the absorption
capacity of the local economy develops. It is likely, then, that these countries would mostly
recycle their petrodollars through capital outflows to the rest of the world, contributing to
dampening interest rates in the oil-importing world.
But the bottom line remains: adjustment is necessary in current account-deficit and current
account-surplus countries, including the increasingly important oil-exporting countries, if the
global imbalances are to be reduced. The rising global imbalances suggest that the steps taken
thus far are insufficient and that the world economy remains subject to serious risks of a
disorderly adjustment (NSouli, 2006). These developments could point to a future role for large
banks in the region like the newly merged entity Emirates NBD bank.
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IV
DISCUSSION:
STRATEGIC
ISBN : 978-0-9742114-5-9
CHALLENGES
OF
REGIONAL
CONSOLIDATION:
In the early oil shocks of 1970s, most petrodollars earned by oil importing countries were
invested in BIS-designated banks overseas particularly US. Accordingly in the absence of local
competition, foreign investment played a major role in picking and choosing the projects in
which to invest in the region or globally. Part of these funds were canalized back to oil importing
countries, through the IMF, to meet their current account deficits with not so much promise of
attractive returns. Much of this happened due to the absence of attractive investment options in
the oil exporting countries themselves. However during the recent spike in oil prices, oil
exporting countries themselves have large projects launched in the entire GCC region to the tune
of US$ 1.5 trillion requiring financial investments. With as much as 44% of these projects
located in UAE and with a nascent investment banking environment (see comments of CEO of
Gulf One Investment Bank) , the investment options in the region open avenues for foreign
investors including large global investment banks. According to the Head of the Central bank of
UAE, local banks need to successfully participate in this investment markets too. For this the
local banks need to create muscle for such large investments and merger of EBI and NBD to
create Emirates NBD bank is a first step in this direction.
A significant role in the above investment scenario is that of respective governments of oil
exporting nations. Most oil companies of these nations being owned by government, they have to
decide how to canalize their excess earnings from booming oil prices (deposits to GDP in UAE
is 105.6% in 2007). In this role the UAE government seems to have adopted a two pronged
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approach. On the one hand it has promoted a financial free zone DIFC to attract large foreign
financial institutions to locate themselves in UAE and bring in funds for investment in the region
and on the other hand they have increased their absorption capacity of the excess oil money
inflows by diverting them to private investment entities for investing in regional projects. A
significant proportion of this continues to be accounted for as capital account outflows for
investment in assets abroad. However not much of the funds are parked in central banks either of
the country or foreign countries.
In creating DIFC, UAE government has been one of the first to promise international standard
investment norms including transparency, accountability and scrutiny under anti money
laundering act. However large private investments including that of the sovereign wealth funds
of these oil producing countries do not come under international banking norms of governance
guaranteeing above transparency and accountability of transactions. Under sustained
international pressure these governments may have to bring more of their investments under
banking norms. For this they may decide to canalize more funds through their banking arm. This
would bring into focus large banking entities like Emirates NBD bank which are themselves
majority government controlled banks. The banks need to have the ability to handle hedge funds
and complex equity investments that have exposure risks and need adequate capital maintenance
and collateral to cover the risk. In the process using credit derivatives and collateralized debt
obligations banks can well protect themselves from poorly underwritten loans as observed by
McKinsey’s. This responsibility includes controlling for inflationary pressures created by illiquid
assets like real estate and arts business (Farrell and Lund, 2007).
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The current investment pattern of petrodollar indicates oil exporting country intention to move
away from excessive oil dependence in future by investing in the non-oil sector. Challenges are
faced by banks like Emirates NBD if they have to recompose their lending portfolios to
accommodate large investment banking to their already existing retail and corporate portfolio.
This would simultaneously bring in the issues of protection of customer interests in an
increasingly concentrated banking industry dominated by a few large banks making profits from
project investments. On one hand small consumer interests could be ignored while on the other
windfall earnings from large investments can be used to cross subsidize the retail sector. By
being very efficient and well performing entities, the local banks can be cross-border take over
targets for large international banks. This would however be decided by local governments who
own majority stake in merged entity like Emirates NBD while avoiding severe challenges of
conflict of interest. Current trends indicate that more of petrodollar is finding its way into
investments in the non-dollar denominated trade including those in Asia. Accordingly with fewer
dollars finding its way back to the US it has serious implication on interest rates, prices and
economic growth of not only the US but the entire world. Therefore in a scenario of global oil
price boom together with recessionary US economy, the oil producing economies take central
stage in deciding the future direction.
As of now it is clear that in the current oil price hike, unlike in the past, oil producing economies
led by UAE are investing more of their petrodollars to fund non-oil expansion projects in the
region itself besides capital purchases of assets abroad. Much smaller amounts of theses excess
petrodollars are finding their way back to banks in the US. This is proving to be an opportunity
to create a very vibrant and attractive financial market for transacting and investing in the Middle
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East region itself. Led by initiative of UAE to create the DIFC as a global financial hub located
somewhere between the hubs of East Asia- Singapore, Beijing and Hong Kong and the western
hubs of London, Frankfurt and New York the large banking entities like Emirates NBD together
with sovereign wealth funds have a major role to play. Challenges of governance and
transparency face these governments as owners of both the oil companies and investment arms.
There is also the challenge of keeping alive a stream of investment projects to attract funds to the
region in the face of alternative investment options across the world. Having a mix of private and
public portfolios of investment may not only help sustain interest in the region but keep an
element of suspense alive. To maintain absorption of petrodollars high in the region, uniformly
rapid expansion of projects in all countries of the region remains essential. Any regional country
not having local projects to invest in may need to park excess funds in foreign banks. Therefore
cooperation across neighbors in opening more investment projects across the region remains
primary. A major boost to this effort can come from the effective functioning of the GCC as a
custom union and then a common market.
V
CONCLUSION:
Based on the unfolding global economy, in the wake of oil price hike and a recessionary US
economy, there appear to be a redefined and expanded role for banks in the ME. As an important
investment arm of the UAE government, the Emirates NBD bank could play a role in domestic
and cross border operations and investments across the entire region. While in the short run it
accumulates the regular efficiency and effectiveness of operations in the existing activities of the
merged entity, in the long run its role may be considerably expanded to handle large project level
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investment options. This might require such banks to develop special competency to identify,
evaluate and invest in high value projects which have very special financing requirements that
could differ considerably from industry to industry in which projects are on offer. In graduating
from a local bank to international operations, these banks will have to have the capability,
recognition and brand image to raise funds from international markets by projecting themselves
as international quality investment banks. These banks in consultation with the respective
governments may need to find ways to establish their credibility including transparency,
accountability and governance at par with reputed institutions like Goldman Sachs and Lehman
Brothers. Otherwise these banks would continue to depend only on government oil revenues to
fund their investments leaving them vulnerable to funding sources when oil prices drop. By
establishing themselves as alternatives sources of fund to the global investment banks, Emirates
NBD bank and the like will continue to uphold the importance of Dubai as an important financial
hub for times to come. This responsibility will rest heavy if in time entities like the sovereign
wealth funds are unacceptable as formal arrangements to participate in international investments
for their lack of transparency and prudential norms. In the long run the study of bank mergers in
UAE and the ME region should therefore go beyond issues of efficiency and concentration to
focus on their pivotal role in positioning UAE and the region as an important global financial
hub.
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REFERENCE:
1. Agénor, Pierre-Richard. 2001. Benefits and Costs of International Financial Integration:
Theory and Facts. World Bank Policy Research Working Paper no. 2699. Washington,
D.C.: World Bank.
2. Banking & Finance. 2008. Paradigm shifts in gulf investment banking. Gulf News:GN
Quarterly Financial Review, May 2, pp 12-13.
3. Banking & Finance: Investment Banking. 2008. Client focus and the other secrets of
success. Gulf News: Quarterly Financial Review, May 2, pp 18-19.
4. Banking & Finance: UAE. 2008. Stacking it up: UAE banks on the roll. Gulf News:GN
Quarterly Financial Review, May 2, pp 22-26.
5. Berger, Allen N.; Robert DeYoung; Hesna Genay; and Gregory F. Udell. 2000.
Globalization of Financial Institutions: Evidence from Cross-Border Banking
Performance. Finance and Economics Discussion Series 2000-4. Washington, D.C.:
Federal Reserve Board.
6. Farrell, D and Susan, L. (2007). The World’s new financial power brokers. The McKinsey
Quarterly, December, pp 1-14.
7. Ghosh, G. (2008). Dubai fourth among future financial hubs. Gulf News, June 7, pp39.
8. Husain, S. (2008). Emirates plans 450-plane fleet. Gulf News, April 23, pp 33.
9. Middle East Monitor. (2008). Economic Cities To Boost Diversification. Vol. 18(6), June.
Business Monitor International, London, UK. pp 2-5.
10. Middle East Monitor. (2008). Risks to GCC Growth: Infrastructure Shortages. Vol.
18(6), June. Business Monitor International, London, UK. pp 6-7.
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11. Moor, R.R. and Siems, T.F. (1998). Bank Mergers: Creating Value or Destroying
Competition. Federal Reserve Bank of Dallas, Third Quarter.
12. NSouli, M.S. (2006). Petrodollar Recycling and Global Imbalances. Paper presented at
the CESifo’s International Spring Conference, Berlin, March 23-24.
13. Reuters. (2007). More GCC banks to merge: Banker. The Gulf Today. June 2, pp 21.
14. The Banker. (2007). Birth of a UAE Champion. September 03. [online] Available:
http://www.thebanker.com/news/fullstory.php/aid/5155/Birth_of_a_UAE_champion.html
. [Accessed May 13, 2008].
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Table-1: Gulf region nominal GDP growth rate versus banking sector balance sheet growth.
Country
Nominal GDP Growth(%)
Banking Balance Sheet Growth(%)
(2006-2008)
(2006-2008)
Qatar
22
42
Kuwait
19
26
UAE
20
28
Saudi Arabia
17
23
Source: Central Banks, EFG-Hermes Estimates as quoted in Gulf News Business, 11th June, 2008, page 37.
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Table 2: Post Merger performance of Emirates NBD Bank
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Item
Value (AED billion)
Change (%)
Net Profits
1.196
37
Total Income
2.198
49
Assets
277
9.3
Loans
175
5.4
Deposits
150
8.0
Total Costs
0.855
48
Cost Income Ratio
38.9%
0.6
Earnings Per Share
0.27
35
ENBD
25.1%
-
EBI
22.6%
2.5
NBD
19.2%
5.9
ROE:
Source: Company source- Emirates NBD First Quarter Ended 31 March 2008.
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Table 3: Comparative performance of UAEs top ten banks on different parameters (2006-2007)
Bank
Emirates
NBD(ENBD
)
National
Bank of Abu
Dhabi
(NBAD)
Abu Dhabi
Commercial
Bank
(ADCB)
Mashreq
Bank
Dubai
Islamic Bank
First Gulf
Bank
Union
National
Bank
Abu Dhabi
Islamic Bank
Commercial
Bank of
Dubai
National
Bank of
Fujairah
Assets
(AED Million)
2006
95878
2007
253812
%
164.7
2006
8878
2007
25159
%
183.
4
2006
2896
2007
4959
%
71.2
2006
1888
2007
2771
%
46.7
2006
9.3
2007
9.9
2006
2.0
2007
1.1
2006
21.3
2007
11.0
Profit
Margin
(%)
2006
2007
65.2
55.9
100966
139431
38.1
9005
11214
24.5
2956
3666
24.0
2106
2505
19.0
8.9
8.0
2.1
1.8
23.4
22.3
71.2
68.3
81088
106214
31.0
10724
11412
6.4
3097
3800
22.7
2147
2085
-2.9
13.2
10.7
2.6
2.0
20.0
18.3
69.3
54.9
56745
87627
54.4
7949
10484
31.9
2827
3850
36.2
1643
2126
29.4
14.0
12.0
2.9
2.4
20.7
20.3
58.1
55.2
30.0
8824
10665
20.9
2819
3652
29.6
1578
2513
59.3
13.7
12.7
2.4
3.0
17.9
23.6
56.0
68.8
64434
83739
Equity (AED Million)
Revenue
(AED Million)
Net profit
(AED Million)
Capital Asset
Ratio(%)
ROA
(%)
ROE
(%)
47759
73198
53.3
8985
10120
12.6
2068
2826
36.6
1536
2008
30.8
18.8
13.8
3.2
2.7
17.1
19.8
74.3
71.1
41571
55457
33.4
6028
6705
11.2
1521
1695
11.4
1010
1179
16.8
14.5
12.1
2.4
2.1
16.7
17.6
66.4
69.6
36290
44042
21.4
2770
5421
95.7
1011
1449
43.2
572
769
34.5
7.6
12.3
1.6
1.7
20.7
14.2
56.6
53.1
18705
30436
62.7
3810
4759
24.9
901
1384
53.6
601
936
55.6
20.4
15.6
3.2
3.1
15.8
19.7
66.7
67.6
8627
12293
42.5
1576
1799
14.1
348
474
36.3
238
324
36.3
18.3
14.6
2.8
2.6
15.1
18.0
68.4
68.4
Source: Banks and figures are as recorded in English language to Emirates Securities and Commodities Authority (ESCA) and displayed on disclosure list and as quoted in Gulf News’
Financial Review, May 2008, page 28.
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Table-4: UAEs top ten banks- 2007
BANK
ASSET SIZE (AED Billion)
MARKET SHARE (%)
Emirates NBD (ENBD)
253.8
26.9
National Bank of Abu Dhabi(NBAD)
139.4
14.8
Abu Dhabi Commercial Bank (ADCB)
106.2
11.2
Mashreq Bank (Mashreq)
87.6
9.3
Dubai Islamic Bank (DIB)
83.7
8.9
First Gulf Bank (FGB)
73.2
7.7
Union National Bank (UNB)
55.5
5.9
Abu Dhabi Islamic Bank (ADIB)
44.0
4.7
Commercial Bank of Dubai(CBD)
30.4
3.2
National Bank of Fujairah (NBF)
12.3
1.3
Source: Reuters, Annual Report of Respective Banks as quoted in Gulf News’ Financial Review, May 2008 page 26.
Table5: Increase in Oil Exporters’ Oil Export Revenue1
Percent of own GDP
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1973-76
48
1.5
1978-81
31
1.4
2002-05
40
1.0
Source: IMF World Economic Outlook.
1Ratios
are relative to GDP in the first year of each period. They exclude Kazakhstan for which oil data are unavailable for all periods.
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Table-6: Imports from the United States, 2004 (in percent of group’s total imports)
Fuel exporters
8.4
Advanced economies
25.8
Other developing countries
19.5
Source: IMF Direction of Trade Statistics.
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