Is bigger necessarily better for Dubai banks?

Posted on October 18, 2011


So many questions, not enough answers.

Emirates NBD

The Emirates NBD headquarters building in Dubai. (Wikipedia)

Dubai continues to consolidate its mainly government owned banking sector, mandating a takeover of the Shariah-compliant Dubai Bank by Emirates NBD, which is already the largest Arab bank by assets. Unlike the “merger of equals” between Emirates Bank International and National Bank of Dubai to create Emirates NBD, this is a takeover, implying that the process will be completed faster, and Dubai Bank will cease to exist at the end of it. However, Emirates NBD Chief Executive Rick Pudner has gone on record to say: “As it stands we see Dubai Bank remaining as a fully owned subsidiary with its own brand identity. Eventually we will look at enhancing synergies within the group.” The synergies referred to here include Emirates NBD’s existing Shariah-compliant lender, Emirates Islamic Bank. How the group will position two Islamic banking brands in an already competitive market remains to be seen.

Apart from the usual guff about strengthening the Dubai banking sector in the international market and making the emirate a more attractive financial hub in the region, little information has been released on the price and process. Analysts expect that the acquisition will be made at “zero cost” to Emirates NBD. This is not entirely true, as the larger bank will be impacted by the losses and non-performing loan portfolio of the smaller lender. While the asset base will increase, so will the challenge of cleaning up and recapitalizing Dubai Bank.

Some of the recapitalization was accomplished in May 2011 when the government of Dubai acquired full ownership of troubled Dubai Bank. According to the last financial statements released by Dubai Bank, for the full year 2009, it posted a net loss of AED 290 million and had made provisioning of AED 445 million for bad loans. Emirates NBD’s most recent full-year results, for 2010, show a net profit of AED 2.1 billion after provisioning of a similar amount. Clearly, NPLs are still a concern and provisioning continues to increase.

Despite the extensive impairments on Dubai Bank’s books, the bank’s balance sheet is relatively small compared with that of Emirates NBD. This means that the expected decline in the larger bank’s capital adequacy ratio as a result of the takeover will be modest. Nonetheless, clarity on the impact of the takeover on each bank’s retail and corporate customers, as well as on the means of integrating their balance sheets, will be eagerly awaited over the next few weeks.

— Yazad Darasha

More intelligence on the Emirates NBD-Dubai Bank takeover (