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Abu Dhabi Banks Maneuver for $137 Billion in Asia to Africa

Abu Dhabi’s largest lenders are embarking on an overseas expansion drive in pursuit of a $137 billion corporate-banking market stretching from Asia to Africa.

National Bank of Abu Dhabi PJSC, the emirate’s biggest lender, is planning hubs in cities such as Mumbai and Lagos to boost growth and fees, while second-ranked First Gulf Bank PJSC (FGB) is seeking to more than double the share of profit at its international unit and plans offices in China and Indonesia. Abu Dhabi Islamic Bank PJSC (ADIB), the emirate’s largest bank complying with Muslim banking rules, is expanding in North Africa.

The banks, stifled for growth in a nation of 8.3 million, are expanding to cut dependence on local real estate markets and access trade flows across the Middle East, Africa and Asia which National Bank of Abu Dhabi estimates are driving a $137 billion revenue opportunity for corporate-banking deals and advice. International expansion may also help banks beat new regulations that will restrict lending to government-related companies.

“There isn’t much growth left domestically, especially for the big balance sheet banks,” Aybek Islamov, a Dubai-based banking analyst at HSBC Holdings Plc (HSBA), said by phone on Nov. 13. “It would be hard for a bank like NBAD to achieve 15 to 20 percent growth unless they start growing again into the public sector, real-estate and construction. Banks are increasingly looking for growth opportunities outside the U.A.E.”

Photographer: Matilde Gattoni/Bloomberg

The National Bank of Abu Dhabi, left, stands in Abu Dhabi, United Arab Emirates. NBAD has a presence in 17 countries from China to the U.K. Close

The National Bank of Abu Dhabi, left, stands in Abu Dhabi, United Arab Emirates. NBAD... Read More

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Photographer: Matilde Gattoni/Bloomberg

The National Bank of Abu Dhabi, left, stands in Abu Dhabi, United Arab Emirates. NBAD has a presence in 17 countries from China to the U.K.

Planning Hubs

NBAD, as National Bank of Abu Dhabi is known, also plans hubs in Singapore, Hong Kong, London, Paris and Washington DC to serve clients in five key industries, Chief Executive Officer Alex Thursby said Oct. 31. The banks will build “more than a one-branch presence” in five large, fast-growing developing economies with an expanding middle class, Thursby said. Egypt will be the first and Malaysia probably the second, he said.

“A key part of our strategy is to build a wholesale bank across the west-east corridor,” which for NBAD extends from the west coast of Africa to the east coast of China, Thursby wrote in e-mailed comments on Nov. 14. “This area will have the greatest growth of the middle class.”

NBAD already has a presence in 17 countries from China to the U.K. and its international business contributed 17 percent of revenue in the nine months through September.

The U.A.E., with about 51 lenders, has the biggest banking market in the six-nation Gulf Cooperation Council, which also includes Saudi Arabia and Qatar. Abu Dhabi, the biggest and the richest of the seven emirates that make up the U.A.E. and holder of about 6 percent of the world’s oil reserves, is joining neighboring Dubai in investing in tourism, metals, ports and real estate to diversify its economy.

Similar Issues

Other banks in the region are confronted with similar growth issues. Qatar National Bank SAQ, the Persian Gulf country’s biggest bank by assets, agreed to pay $1.97 billion to buy the Egyptian unit of France’s Societe Generale SA (GLE), while Dubai-based Emirates NBD PJSC agreed in December to buy BNP Paribas SA’s Egyptian unit for about $500 million.

Banks from the region should keep their foreign businesses small because those markets are “not their strength,” said Shabbir Malik, a Dubai-based analyst at EFG-Hermes Holding SAE.

“It would be better to concentrate on the region and have some presence in other parts of the world with links to the U.A.E. that could support their local business,” he said.

First Gulf Bank, controlled by the emirate’s ruling family, plans offices in South Korea, China and Indonesia over the next 18 months, adding to its presence in Singapore, India, Hong Kong, Qatar and Libya, CEO Andre Sayegh said in August.

Abu Dhabi Islamic Bank applied for licenses in Algeria and Libya and is considering Tunisia and Morocco, CEO Tirad Mahmoud said in August.

Customers Trading

“You have customers trading between China and Africa and the aim is to capture as many of those kind of deals that can provide very attractive fee income,” HSBC’s Islamov said.

NBAD has a medium-term return on equity target of 15 percent, while First Gulf Bank is targeting 18 percent. NBAD rose 2.2 percent to 11.85 dirhams as of 1:15 p.m. in Dubai, while First Gulf Bank rose 0.6 percent to 16.50 dirhams.

Lending growth in the U.A.E. rebounded to 6.1 percent in the eight months through August, according to Central Bank data. While that’s better than the 1 to 4 percent after the 2008 financial crisis, it’s short of the 30 percent annual expansion registered in the four years before 2008 and the 15.6 percent gain posted in July by Saudi Arabia, the largest Arab economy.

NBAD, which had assets of $94 billion at the end of September, boosted earnings at an annual rate of 9.4 percent over the past five years. First Gulf Bank, with assets of $52 billion, posted earnings growth of 8.4 percent on that basis.

Revenue Streams

Abu Dhabi-based lenders “are trying to diversify their revenue streams, because they’re over-capitalized and looking for growth,” EFG’s Malik said by email on Nov. 14. They want to “continue to grow their loan book by 10 percent, which will be challenging just by focusing on the U.A.E.”

The push to diversify revenue comes after U.A.E. banks set aside more money for bad debt as defaults by local companies jumped during the credit crisis. The lenders extended cheap credit to government-related companies to purchase assets near peak prices, while others bought real estate prior to the collapse of the U.A.E.’s property market.

New central bank regulations, likely to come into effect this year, will restrict lending to the government and its companies. The central bank in April 2012 said that banks mustn’t lend more than 100 percent of their capital to local governments and the same amount to government-related entities.

Problem Loans

The average non-performing loans ratio of U.A.E. banks probably peaked at about 12 percent in 2011, after rising from 8 percent to 10 percent in 2010, according to Moody’s Investors Service. Non-performing loans at Dubai banks rose to between 15 percent and 17 percent of total lending at the end of 2011.

The local banks are hiring international executives to aid the expansion push. NBAD’s Thursby joined in July from Australia & New Zealand Banking Group Ltd. (ANZ) where he was CEO for international and institutional banking. First Gulf Bank hired earlier this year Simon Penney, Royal Bank of Scotland Group Plc’s former CEO for the Middle East and Africa, to head its wholesale banking division and also recruited Steve Perry from Standard Chartered Plc (STAN) to head its debt-markets business.

International expansion “will enable banks to create some buffers, so when the U.A.E. slows down some of the other markets would be doing well,” Malik at EFG-Hermes said. “Right now loan growth in the U.A.E. is about seven percent, but it is difficult to see how it can continue growing at high single digit rates over the long-term.”

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net; Claudia Maedler at cmaedler@bloomberg.net

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