The emirate’s banks map out a vast territory for expansion from West Africa to East Asia

The UAE is often said to be over-banked, with 23 local banks and 28 foreign institutions currently licensed to operate in the nation. To be sure, banking density in the UAE – at 11.9 branches per thousand people, according to data from the World Bank – is high compared to some markets in the region. Yet many of its neighbours have developed far more densely populated banking industries. Oman has a banking density of 19.7 per thousand people, while the hydrocarbons-driven economies of Qatar and Kuwait show densities of 13.2 and 18.6, respectively.

Strength In Numbers

Industry participants have nevertheless been concerned about the number of market players for more than a decade. The “over-banked” theory was well established as far back as 2002, when Dubai Bank entered the arena and its new CEO addressed concerns that the market already had too many lenders, asserting that there was plenty of business to go around for local and international institutions. More recently, the chairman of the UAE Banks Federation articulated a similar view. Speaking on the sidelines of a Chinese forum, Abdul Aziz Al Ghurair said the UAE banking sector is “not over-banked” but rather, the diversity of the financial sector is a key national strength.

The balance sheets of UAE lenders would seem to support this assessment. As Al Ghurair pointed out, most local banks posted double-digit growth in profits for the first half of 2014, with growth in both assets and profitability expected to continue over the next few years. However, while such sectoral performance may have precluded the need for industry consolidation – which was most keenly felt in the years following the global economic crisis – the nation’s largest players are still faced with strategic challenges. Over-banked or not, the UAE market is a finite one, and while growth can be achieved on the back of the government’s programme of capital spending and the expansion of non-hydrocarbons activity, leading institutions are looking beyond the UAE’s borders for expansion opportunities – begging the question: Where to next?

West-East Corridor

In 2014 the emirate’s largest lender, National Bank of Abu Dhabi (NBAD), made an interesting contribution to this debate. Speaking at the UAE Global Investment Forum, organised by Abu Dhabi’s Department of Economic Development, Alex Thursby, NBAD’s Group CEO, outlined a growth strategy with a distinctly outward-looking theme. Although the bank wants to “remain and develop further to be the best bank in the UAE”, its wholesale division will focus on expanding in a rapidly growing “West-East corridor” – an area extending from West Africa through the MENA region and across the central latitudes to East Asia. This vast swathe of the planet is, according to Thursby, full of potential from a banking perspective: “The West-East corridor will see the greatest emergence of the middle class in the next 20 years,” he told local press in October 2014. “By 2025, all but two of the new mega-cities of the world will come from this corridor.” Given NBAD’s status in the emirate, this strategy is significant and may have wider implications for a sector that many think needs to embark on its next phase of growth in foreign markets.

The merits of the proposal are not hard to discern. The West-East corridor, as defined by NBAD, is already home to 13 mega-cities (those with populations over 10m): Istanbul, Cairo, Mumbai, Delhi, Manila, Beijing, Tokyo, Osaka, Karachi, Dhaka, Kolkata, Chongqing and Shanghai. Perhaps more importantly, the corridor contains a further 12 cities that are set to become mega-cities by 2025, according to McKinsey Global Institute: Lagos and Kinshasa in West Africa; Lahore and Chennai in central Asia; Jakarta in South-east Asia; and seven cities in China – namely, Chengdu, Wukan, Shenzhen, Tianjin, Dongguan, Guangzhou and Hangzhou. The bank is taking a two-pronged approach to penetrating this vast market. It plans to both bank customers from within the corridor, and provide services to those outside the corridor that wish to trade and invest within it.

Trade and investment levels in these regions are already buoyant and, according to NBAD, most parts of the West-East corridor area are set to grow by double digits. Intra-Asian foreign direct investment (FDI), for example, reached $213bn in 2011. In the years leading up to 2020, it is expected to expand at a compound annual growth rate (CAGR) of 12%, to reach $614bn. Markets where FDI has stayed at a lower level have the potential for even more rapid expansion. Intra-African FDI, at $2bn in 2011, is set to reach $15bn by 2020, for a CAGR of 25%.

The economic connections between different parts of the corridor, meanwhile, are also expected to proliferate. The sum of imports and exports between the Middle East and Asia exceeded $1trn in 2011 and is expected to rise by 12% per year until 2020, reaching $2.7trn. The fundamentals are clearly promising.

Currently, one of the key concerns of Abu Dhabi-based banks looking to enter these markets is to develop a more fine-grained assessment of potential target sectors. In the case of NBAD, for example, this is already in place: “Our wholesale banking has identified the five sectors that align with the bank’s strategy as financial institutions – energy, aviation and transport, real estate, family conglomerates and retailers,” Thursby told OBG.

The Next Steps

The West-East corridor concept may become something of an industry theme for the Abu Dhabi banking sector. NBAD aims to deepen its wholesale network across the corridor over the next five years, a process that will see it integrate its existing European and North American platforms with its new business. During this time, it also intends to build five international bank franchises in the corridor’s largest and fastest-growing economies.

Abu Dhabi Commercial Bank, the emirate’s third-largest lender, already has a track record in the corridor, having established a branch in Mumbai in 1980 and in Bangalore in 1996. It also entered Malaysia’s market through a 25% stake in a local bank, which it later sold. In 2014 First Gulf Bank made a considerable advance into the Asia-Pacific market, launching a representative office in South Korea, adding a global wealth management unit to its Singapore branch and announcing plans to open a new office in China. Union National Bank already has a presence in the Egyptian market, having acquired Alexandria Commercial and Maritime Bank – now the Union National Bank of Egypt. Abu Dhabi Islamic Bank (ADIB), the largest sharia-compliant institution based in the emirate, also chose Egypt to launch its foreign expansion, acquiring a 49% stake in the National Bank of Development. ADIB has since opened branches in the UK, Iraq, Sudan and Qatar, and bought a consumer finance business in Saudi Arabia.

It seems that Abu Dhabi’s banks share a similar view to NBAD in terms of where future growth will be found and the emirate’s ability to capitalise on it. “Within the West-East corridor, the UAE is a significant and influential enabler of commerce,” Thursby told OBG. “Its free and open economy is the 30th largest in the world, and its strong fundamentals are strengthened by its location at the heart of the corridor, where trade and FDI flows are growing by more than 10% in some cases.”

Of course, there is always room for alternatives. One of the more interesting forays into foreign markets from Abu Dhabi in recent years was by the sharia-compliant Al Hilal, which set up Al Hilal Bank Kazakhstan in 2010. By 2013 the bank had established three branches in Almaty and two others in Astana and Shimkent, offering a range of locally focused corporate and retail services. The rationale underpinning this move was largely that Kazakhstan – despite having a population that is 70% Muslim – lacked a dedicated Islamic bank. For most of Abu Dhabi’s larger banks, the West-East corridor represents an exciting opportunity as they set about the challenging task of expanding their global footprint.