Will small banks be gradually crowded out in the ‘over-banked’ UAE?

 Degrowth feared in assets, deposits, loans of small banks 


ABU DHABI/November 28-2020: A fairly long spell of slow-down, which has further been exasperated by the inexorably troublesome COVID 19, may have triggered a gradual crowding out of the small banks in the UAE that boasts close to 50 commercial banks – both national and foreign.

The country, which had witnessed a contraction of its economy by 5 per cent in 2009, is destined to close the current year too by registering a negative growth.

Asset base of small banks degrows

An analysis of statistics of the UAE banks in the past two years reveal that while most small banks have degrown during the said period, albeit marginally, the large banks have been able to grow fairly well on all fronts, whether it be asset base, loans or deposits.

And the trend has certainly been accentuated by the fact that it has been the larger banks that had pursued mergers in the past few years and grown further large rendering the role of smaller banks less relevant in the market.

Flight to safety?

And arguably, the market has been increasingly witnessing flight-to-safety, which has been largely construed as ‘flight-to-size’, thanks to the fact that all large banks are backed by cash-rich sovereign funds of either Abu Dhabi or Dubai.

An analysis of the books of small banks, represented by viz. Commercial Bank International (CBI), InvestBank, National Bank of Fujairah (NBF), National Bank of Umm Al Quwain (NBQ), RakBank and Ajman Bank testifies that fact.

During the past two years, from September ‘19 to September ’20, only three from the group of small banks – viz. NBF, RakBank and Ajman Bank have been able grow their asset book, that too by less than 5 per cent (combined).

And more importantly, the aggregate asset base of the said six small banks (representing 6 Emirates) has, in fact, contracted, though marginally, from AED160.16 billion to AED159.76 billion during the two-year period.

Larger the faster

On the contrary, businessbenchmark.news found that the total assets of the largest three banks in the country, First Abu Dhabi Bank (FAB), Emirates NBD and Abu Dhabi Commercial Bank (ADCB), have soared close to 29 per cent – from AED1.60 trillion to AED2.06 trillion during the same period.

And again, the two largest banks in the country – FAB and Emirates NBD saw their assets grow from AED732.16 billion to AED955.15 billion and from AED492.80 billion to AED692.14 billion respectively.

These growths represent an uptick of 30.45 per cent in the case of FAB and 40.45 per cent in the case of Emirates NBD. During the same period, the total assets of the UAE banking system grew by only 14.59 per cent, expanding from AED2.84 trillion to AED3.25 trillion.

Another way the trend can be looked at could be that while the total assets of the selected six small banks accounted for 5.64 per cent of the banking system as of September end, 2018, it declined to 4.91 per cent, two years down the line.

In the case of the three large banks under review here, while the total assets accounted for 56.32 per cent in September 2018, their share increased to 63.24 per cent two years later.

Talking to businessbenchmark.news, Pradeep Chandra (seen in the picture – middle), a senior banker based in DIFC, said during such bad times, ‘flight to safety’ is a sure trend observed in any markets. He said the small banks will have to become niche players exhibiting unique strengths as a survival strategy.

“They either will have to merge, be acquired or evolve into niche players specialising in select areas, and become centres of excellence in diligently chosen activities, or train their focus geographically,” Chandra added.

Loan growth

During the period under review, all small banks, but Ajman Bank, saw their loan book decline, and even in the case of Ajman Bank, the growth in its loan book during the past two years has been by a meagre AED1.17 billion, whereas the aggregate loan book of the six banks contracted by 8.12 per cent against 17.80 per cent growth exhibited by the three large banks during the same period.

Interestingly, FAB’s deposits book has grown too fast that the bank, instead of lending the available funds, routed a big chunk of it – a whopping AED277.51 billion (as of September end, 2020) to Central banks, within the UAE as well as overseas.

Shabbir Malik (Seen in the picture – bottom), a senior banking analyst at EFG Hermes, responding to a query from BBN, noted that the banking is increasingly becoming business of scale, which is making it challenging for the smaller players.

“Large banks, on the other hand, tend to have better cost of funds, distribution capability, and deeper pockets to invest in digital technologies, which works in their advantage ,” Malik added.


On the deposits front too, obviously, the large banks have succeeded in attracting big depositors. While the aggregate deposits of the small banks (6 selected here) dropped by about 6 per cent during the said two-year period, the large banks saw their deposit base grow by more than a quarter – from AED1.04 trillion to AED1.30 trillion.

Going forward, the game might get tougher for smaller players compared with larger banks. The small banks will have to finnd their elbow space in a turf where they face competition from more than two dozens of established foreign banks too.

But Malik believes that smart small banks will have a space. “There will still be room for small banks, but only for those that are either nimble or operating in niche areas,” Malik warned.


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