UAE bank chief calls for more mergers in ‘crowded’ financial sector

Chief executive Shayne Nelson told Gulf Business that banks in the UAE are struggling to diversify their income streams.

Nelson said: “There are a lot of licensed banks in the UAE, but the population isn’t that big. It’s unusual for so many banks to be in a country that has the population that the UAE has.”

Nelson said in the interview that around 54 banks operate in the UAE, not including those that function out of the Dubai International Financial Centre. As competition increases, “banks are fighting hard for market share” therefore consolidation would help the industry, Nelson said.

“Emirates NBD is an example of where we had two good mid-size banks create a regional champion and we need more of that going forward,” Nelson said. “If you really want to get economies of scale and the capability to diversify your earnings, you need size and capital. And mid-size banks are going to find that difficult because what they can buy will be quite limited for the amount that they can put forward.”

Nelson said in-market mergers work much better monetarily, because banks can cut costs on several aspects, such as reducing branch numbers.

However, he said “a lot of issues tend to arise” during in-market mergers, especially when it comes to deciding the management. In addition, such mergers could be “particularly challenging” in the UAE because of the ownership structure of local banks.

“A lot of the banks here are controlled by families, which will probably make it a bit more difficult,” Nelson said.

Nelson’s comments reflect analysis in a December 2013 report by global management consulting firm A T Kearney, which said growth prospects in the UAE were weaker, despite a projected 4.8% rise in gross domestic product over the next few years.

The report said: “This is because of high (135%) banking penetration and an overbanked market, with the top four players holding 54% of the market and the remaining 47 sharing the other half. Clearly, there is room for consolidation. In fact, the UAE has already seen some mergers and acquisitions, with the merger of Emirates Bank and National Bank of Dubai to create Emirates NBD being the best-known example. Others include Emirates NBD's merger with Dubai Bank and Abu Dhabi Commercial Bank's acquisition of Royal Bank of Scotland's UAE retail banking business.”

According to the report, “further consolidation will require clearing hurdles such as the ownership structure, with governments and founding families owning significant stakes in many Gulf Cooperation Council banks”. The paper said regional expansion “is another option”, which for some “may mean deeper penetration of neighbouring emirates, while bigger players should consider broadening their international footprints”.

In May 2014 the chief operating officer of UAE Exchange Centre, Sudhir Kumar Shetty, said the money remittance business, which had seen “phenomenal growth in the UAE”, was likely to go through a consolidation phase “in the not so distant future due to the rising competition, increasing costs and the large number of players in the business”.

Shetty told ‘Gulf News’: “We have 132 licensed players in money changing and money transfer business in the UAE. Now many banks too are entering the business. We see competition coming from all sides.”

Amir Ahmad of Pinsent Masons, the law firm behind Out-Law.com, said: "consolidation is a sign of development and maturity that the banking sector is presently undergoing in the UAE".