Regulatory changes set to strengthen financial services in Sharjah

Sharjah is home to four local banks and two insurance companies, with a banking market that is characterised by significant minority government ownership stakes in several key players, as well as a tendency for local banks to eschew the retail and small and medium-sized enterprise (SME) markets in favour of larger corporate and government-owned business.

The emirate does not host a capital market of its own, but the government and several local entities are already – or are on the road to becoming – regular issuers of debt and sukuk (Islamic bonds). Thus far, the emirate has issued three sukuk, showing the emirate’s interest in the sukuk as an instrument for the diversification of funding services.

Sector Contribution

The financial and insurance sector’s contribution to the emirate’s GDP was Dh9.5bn ($2.6bn) in 2017, equivalent to 10.3% of the total and 11% of non-oil GDP, according to preliminary data from the Federal Competitiveness and Statistics Authority. This figure was up from Dh8.66bn ($2.4bn) in 2016 at current prices, or 10.1% of GDP and 11% of non-oil GDP.

Recent years have seen the sector steadily growing in size, not only in absolute but also in relative terms, having expanded from 7.9% of GDP and 8.8% of non-oil GDP in 2010. According to credit ratings agency Moody’s, the banking sector grew at an annual rate of 12.7% from 2012 to 2017.

Active Banks

As of 2016 there were 32 banks operating 125 branches throughout the emirate, with the majority of these located in Sharjah City and Hamriyah (102), followed by 15 in the eastern region and eight in the central region. Domestic banks’ total assets are worth 204.1% of GDP, according to Moody’s December 2017 credit analysis of the emirate. The local banking sector is led by Islamic banks. The institution with the largest number of branches in the emirate was Sharjah Islamic Bank (SIB) with 21, followed by Dubai Islamic Bank with 18 branches. Emirates Islamic Bank and First Abu Dhabi Bank round out the top-four banks by branch size with 10 each, with First Abu Dhabi Bank being the only non-Islamic bank in the top-four spots. United Arab Bank and InvestBank, both headquartered in Sharjah, operated six branches each within the emirate, while Bank of Sharjah, which is not heavily active in the retail market, operated just one.

Of the 45 commercial banks listed by the UAE Central Bank as active in the country, four are headquartered in Sharjah. Shares in all four banks trade on the Abu Dhabi Securities Exchange (ADX).

Largest Player

The largest of the four, both in terms of assets and branch network size, is SIB. Founded as National Bank of Sharjah in 1975, the institution adopted its current name when it gained sharia-compliant status in 2002 – the first time anywhere in the world that a conventional bank had been converted into an Islamic institution.

It continues to grow rapidly: in 2017 the bank’s assets were worth Dh38.3bn ($10.4bn), up from Dh33.5bn ($9.1bn) the previous year and Dh29.9bn ($6.2bn) in 2015. SIB is particularly active in the corporate and government segments, from which 64% of its 2017 income was derived, followed by retail at 21%, and investment and Treasury at 13%. Profits grew by 3.2% in 2017, to Dh477.7m ($130m), following growth of 12.9% the previous year.

The largest shareholder in the institution is the government of Sharjah, primarily through its investment arm Sharjah Asset Management, which holds a 28.5% stake in the bank, according to the ADX. January 2018 saw the bank increase its capital by issuing Dh266.8bn ($72.6bn) of sukuk, convertible into ordinary equity, to the Sharjah Social Security Fund. Following the sukuk-based transaction the latter had a 9.1% share in the bank.

The other major shareholder in SIB is Kuwait Finance House, which possesses a 18.2% stake. SIB operates three non-banking subsidiaries, namely real estate developer ASAS Real Estate; trading, investment and wealth management firm Sharjah Islamic Financial Services; and Sharjah National Hotels, which operates three hotels throughout the emirate.

Oldest Bank

The oldest bank headquartered in the emirate is Bank of Sharjah, which has been active since 1973. As with SIB, the Sharjah government is the largest shareholder in the institution, again through Sharjah Asset Management, for a stake of 17.2%. Other major shareholders include UAE conglomerate Al Saqr United Group, holding 12.75%, and local businessman and founding director of the bank, Ahmed Abdalla Al Noman, with 5.8%.

Bank of Sharjah, primarily active in the corporate and enterprise sphere with little retail activity, registered assets of Dh30.5bn ($8.3bn) at the end of 2017, up 13% on the previous year. Net profits were down 34% to Dh265m ($72.1m), due in part to an 11% fall in net interest income as a result of its net interest margin narrowing from 2.2% to 1.8%. This brought its return on assets down from 1.5% to 0.9% and its return on equity from 8.7% to 6.5%.

The bank operates six subsidiaries: Lebanese financial institution Emirates Lebanon Bank; four UAE-based investment, trading and real estate firms; and a Cayman Islands-based financial institution. The latter five are wholly owned by the bank.

Private Banks

The government does not hold a major stake in either United Arab Bank or InvestBank, the other two banks headquartered in emirate. Commercial Bank of Qatar is the major shareholder in United Arab Bank, the emirate’s third-largest financial institution, with a holding of 40%, while the institution’s founder, Sheikh Faisal bin Sultan Salem Al Qassimi, holds a 10.3% stake. United Arab Bank held assets of Dh20.6bn ($5.6bn) at the end of September 2017. Having a loss in 2016 of Dh523m ($142.3m) – following on from another year in the red in 2015 – the bank returned to profitability in 2017, on a return of Dh17m ($4.6m). United Arab Bank credited this to a strategy launched in 2015 that saw it work to move away from high-risk, non-core activities such as lending to the SME segment, which saw a spike in delinquencies across the UAE following the 2014-15 oil price slide. InvestBank held assets of Dh16.95bn ($4.6bn) at the end of 2017, up from Dh16.13bn ($4.4bn) a year earlier, and net profits for 2017 were up 7.7% to Dh594.7m ($161.9m) from Dh552.1m ($150.3m) the year before. Its major Against a wider backdrop of recent consolidation in the national and regional banking sectors, in November 2017 international media reported that InvestBank and Bank of Sharjah were negotiating a potential merger shareholders are UAE-based investment group International Private Group and Dubai-headquartered Emirates Investment Bank, with shares of 15.5% and 14.6%, respectively. Like Bank of Sharjah, the focus is on corporate and government lending, and although it includes some retail products for corporate clients, it is not active in the mass retail segment.

Merger Report

Against a wider backdrop of recent consolidation in the national and regional banking sectors, in November 2017 the international media reported that InvestBank and Bank of Sharjah were negotiating a potential merger.

Based on recent figures, such a move would create an institution with assets in the region of Dh47.5bn ($12.9bn), which is substantially more than the Dh38.3bn ($10.4bn) overseen by SIB at the end of 2017, thereby making the new entity the largest bank headquartered in the emirate (see analysis).

Lending & Deposits 

According to Moody’s December 2017 credit analysis for Sharjah, the loan-to-deposit ratio of the emirate’s banks stood at 100.8%. Total advances to Sharjah residents – from all banks, including those headquartered outside of the emirate itself – were worth Dh82.35bn ($22.4bn) in 2016, based on the latest available DCSD data, including Dh41.0bn ($11.2bn) of loans to the private sector, Dh22.98bn ($6.3bn) of credit to individuals, and Dh11.84bn ($3.2bn) of lending to the government and public sector. Resident bank deposits stood at Dh69.25bn ($18.8bn), Dh61.71bn ($16.8bn) of which came from the private sector and retail clients, Dh4.04bn ($1.1bn) came from the government and Dh2.05bn ($558m) from government-related enterprises – defined as companies in which the government holds a stake of 50% or more.

Regulatory Changes

Early 2018 saw the implementation of the International Accounting Standards Board’s ninth International Financial Reporting Standard (IFRS 9). The new rules have implications for the banking world because they require firms to put more weight on anticipated losses from financial assets, such as loans in their accounts, and to adopt stricter provisions against potential bad debt.

“IFRS 9 is a game-changer,” Varouj Nerguizian, general manager of Bank of Sharjah, told OBG. “It will be challenging at the beginning, but it could contribute to the long-term profitability and bottom line of banks here,” he said. The UAE Central Bank also aims for the sector to be compliant with remaining Basel III banking sector standards by the end of 2018, having first introduced the framework’s capital adequacy ratios in March 2017. Already, the sector is comfortably in line with these requirements as SIB registered a capital adequacy ratio of 21.1% at the end of 2017, compared to the Basel III requirement of 12%, and further increased its capital in early 2018. Bank of Sharjah’s ratio stood at 20.4% as of the end of the third quarter in 2017, and InvestBank had a ratio of 18.5%. Although UAB was lower, at 13.2%, the bank continued to recover from 2015-16 losses, and remained ahead of the minimum requirements.

Stable System

In October 2017 Moody’s maintained its stable outlook for the UAE’s national banking system, which it said reflected economic resilience, strong capitalisation, and stable funding and liquidity conditions. It forecast that the sector’s return on assets would average between 1.5% and 1.7% over the following 12 to 18 months, predicting that reduced operating expenses and a slowing of growth in provisioning would compensate for increased pressure on margins.

Insurance

There are two insurance companies headquartered in the emirate, and both – as with the emirate’s four banks – have shares listed on the ADX. The older of these is Sharjah Insurance Company, founded in 1970 as the first insurance firm in the UAE. The company reported revenues of Dh63.27m ($17.2m) for 2017, down 7.6% from 2016. The other Sharjah-based insurance operator is Al Buhaira National Insurance Company (ABNIC), founded in 1978, which posted revenues of Dh537.4m ($146.3m), down 21.5% for the same period. While turnover at both of the firms was down for the year, profits were up, from Dh19.3m ($5.3m) to Dh22.4m ($6.1m) for Sharjah Insurance, and from Dh42.7m ($11.6m) to Dh57.7m ($15.7m) for ABNIC.

Despite this, 2017 saw Sharjah Insurance Company outperforming the wider UAE insurance market by undertaking a range of reforms that helped to improve their performance, including a tightening of their underwriting policies – which now, for example, no longer cover standalone warehouses. In addition, they put a new technical team in place and worked toward further developing and their sales teams.

This year appears to be shaping up to be another solid year, with a bottom line bolstered by strong government business. As of January 1, 2017 Sharjah Insurance has been providing group life insurance coverage for the employees of the UAE Central Bank, and has recently won contracts to cover the government of Sharjah’s motor fleet.

While revenues at the two locally headquartered firms was down in 2017, the industry has been expanding at a rapid pace in recent years. The value of paid premiums, including from within Sharjah to firms headquartered in other parts of the country, stood at Dh2.46bn ($670m) in 2016, up 13.9% from Dh2.16bn ($588m) in 2015. Sector activity expanded at an even faster rate than the previous year, rising by 39.4%, according to the Department of Statistics and Community Development (DSCD). However, paid claims have been increasing at a slower rate than premiums, from Dh739.3m ($201.2m) in 2014 to Dh804.6m ($219m) in 2015 and Dh933.3m ($254m) in 2016, which is supporting margins in the industry.

Premium growth has been driven largely by two product lines, namely life and health insurance. Between 2014 and 2016 life insurance premium doubled from Dh609.9m ($166m) to Dh1.22bn ($332m), while health premium grew by 84.8% over the same period, from Dh295.2m ($80.4m) to Dh545.6m ($148.5m). The two are now the largest insurance lines in the emirate, with life accounting for 49.6% of premium in 2016 and health 22.2%.

The medical insurance market has been bolstered by the 2017 implementation of a legal requirement in neighbouring Dubai mandating that private sector employers provide health insurance for their employees and those employees’ dependants; a similar policy already existed in Abu Dhabi. In addition to boosting the national market for health insurance, the move has prompted speculation that other emirates could introduce similar requirements. The third-largest insurance line in 2016 was automobile insurance, with premiums of Dh439.2m ($120m), up 13.3% on 2015, or equivalent to 17.9% of total premium in the emirate. As in many jurisdictions, strong competition in the automobile segment has pushed down margins and has served as a deterrent for those insurance companies who might have otherwise considered expanding their activity in the retail motor sector.

A move with the potential to improve margins was undertaken in January 2017, when the national car insurance market introduce new unified motor insurance rules, including a minimum premium of Dh1300 ($354). Even though the new minimum premiums have, in some cases, boosted profitability, there remain categories that generate losses, in particular at the lower end of the market, according to stakeholders. Other promising business lines, in addition to health and life insurance, include real estate developments and the SME insurance market.

Distribution Network

The industry’s distribution network has been growing rapidly in recent years, which accounts for some of premium growth. According to figures from the DSCD, the number of insurance company branches in the emirate stood at 36 in 2016 – 25 branches of Emirati insurance firms and 11 branches of foreign firms – up from 32 in 2015 and double the figure of 18 in 2014.

The expansion has largely been driven by Emirati operators, the branch network of which more than doubled from 10 in 2014. One such example is Sharjah Insurance, which, having opened a new branch in the Al Rolla district of Sharjah City in 2017, plans to open more branches in Dubai, expanding as the UAE insurance market grows. The market’s expansion can be attributed, in part, to the maturing of the medical insurance market as customers become increasingly educated about health insurance in particular.

Debt Market

In recent years, Sharjah has become a substantial issuer of both sovereign and corporate debt, and in particular sukuk. As part of a programme to restructure its outstanding debt and reduce costs – by replacing bank credit with rated bonds that carry lower interest rates – and against a wider regional backdrop of stepped-up debt issues as oil prices began to fall, the government of Sharjah became an issuer of sovereign debt. The government’s first sukuk, launched in September 2014, was a dollar-denominated, 10-year issue worth $750m, with a coupon of 3.76%. This was followed in early 2016 by a $500m, five-year sukuk issued at a rate of 3.84%. In February 2018 the government issued a RMB2bn ($299.8m) so-called panda bonds – the yuan-denominated instrument issued on the Chinese debt market – making it the first Middle Eastern government to do so. The following month the government sold $1bn worth of sukuk, its largest issue to date, on the international market. The instrument, which was 2.4 times oversubscribed, has a 10-year tenor and was priced at 135 basis points above the 10-year midswap rate. Based on prevailing trends, the emirate is expected to become a more regular issuer of debt in the coming years (see Economy chapter). SIB is also a regular issuer of sukuk. The bank currently has three outstanding instruments listed on the Nasdaq Dubai and the Irish Stock Exchange, issued between April 2013 and September 2016. Each is worth $500m and has a tenor of five years. The bank has stated it is planning further issues.

Reaching Compliance

Another local issuer of sukuk is Sharjah-headquartered energy company Dana Gas, in which the largest individual shareholder is Sharjah-based energy firm Crescent Petroleum, with a 19% stake. Dana Gas entered the debt market in 2007, when it issued a five-year, $1bn sukuk, which was then followed in 2013 by a dual-tranche issue worth $850m listed on the Irish Stock Exchange – though $150m of this debt has since been converted or bought back. The instrument was due to mature in October 2017, however, amid reported difficulties in 2017, the firm began negotiations with its creditors to restructure the instrument, and in June 2017 the company announced that changes in industry practice meant that the sukuk was no longer sharia-compliant or lawful, meaning that it could not be redeemed in its current form. Various company proposals and counterproposals to restructure the instrument were rejected by both Dana Gas and a group of global investors holding the sukuk. The dispute has moved to UAE and UK courts, where it was under negotiation as of early 2018 and has sparked discussions about the international sukuk market, with concerns that a victory by Dana Gas could set a precedent allowing issuers to restructure their debts on similar grounds.

Outlook

While it remains a small market, Sharjah’s financial services sector continues to be integrated with the rest of the UAE and the broader GCC region, carving out a niche as a conservative banking system, a rapidly expanding insurance market and an issuer of sovereign and corporate sharia-compliant debt instruments. “Factors such as Expo 2020, the recovery in oil prices and the implementation of VAT, should encourage government spending on infrastructure that will positively affect a range of sectors, allowing banks to further diversify their lending offers so as to continue to achieve growth in profitability,” Ahmed Saad, deputy CEO at SIB, told OBG. In addition, the emirate’s banking sector may be about to witness a merger that could boost its ability to compete with larger banks headquartered in other parts of the country, with regulatory changes set to further establish the stability of the national banking industry as a whole.

In the insurance sector, moves to strengthen the national automobile insurance market, in tandem with the regional trend towards mandatory health coverage for employees and their dependents, should support significant industry growth, as well as develop awareness of the different types and uses of insurance available, despite industry concerns about the segment’s profitability.

On the capital markets front, both the government and local corporations appear set to continue to make regular returns to international debt markets – in particular for sukuk – in the coming years, although the outlook for sukuk may depend on the outcome of the ongoing dispute between Dana Gas and a group of global investors, on whether or not the Dana Gas sukuk continues to be sharia-compliant. A legal victory for the firm would likely reduce the confidence on the part of investors in regards to future enforceability of the terms of such debt. That said, the outlook for the emirate’s banking sector appears positive both in the short and medium term.