Money makers: Credit and credibility: an active emirate sector since the 1970s

The financial services sector accounted for 10.3% of Sharjah’s GDP in 2015, according to Moody’s credit rating agency, in line with the figure for the UAE as a whole. The sector has been growing rapidly in recent times, at an average rate of 12.7% over the previous five years. It primarily consists of four locally headquartered banks and two locally-based insurance companies, with institutions based in other emirates that are also active in the local market. Assets of locally headquartered banks contracted slightly in the first nine months of 2016 as non-performing loans in the small and medium-sized enterprise (SME) segment saw banks take provisions and scale back lending, but assets remained well above their 2014 levels, with profits recovering at some institutions that had suffered in 2015. Meanwhile premiums and profits at locally headquartered insurance firms have risen in recent years.

INDUSTRY PLAYERS: The four banks headquartered in Sharjah were all founded in the 1970s: Sharjah Islamic Bank (SIB), United Arab Bank (UAB), Bank of Sharjah and InvestBank. With combined assets of AD96.1bn ($26.2bn) at the end of 2015, the institutions are smaller than the major banks in other emirates such as National Bank of Abu Dhabi and Emirates NBD Bank, which respectively had 2015 assets of AD406.6bn ($110.7bn) and AD407bn ($110.8bn). Although Sharjah headquartered banks have the largest branch networks in the emirate, industry figures show that banking activity in the emirate is dominated by large banks headquartered in other parts of the country.

SHARJAH ISLAMIC BANK: SIB has been operating since 1975 and converted from a conventional bank to an Islamic institution in 2002. The Sharjah government is the largest shareholder in the bank through state-owned investment fund Sharjah Asset Management, with a stake of 31.3%. Kuwaiti Islamic bank Kuwait Finance House also owns a 20% stake in the firm, while the remaining 48.7% of its shares trade on the Abu Dhabi Securities Exchange (ADX). In addition to its banking business, SIB also operates three subsidiary companies: Islamic finance company Sharjah Islamic Financial Services, real estate developer ASAS Real Estate and its hotel arm Sharjah National Hotels.

The institution is the largest bank in the emirate, with total assets of AD29.9bn ($8.1bn) in 2015, up from AD26bn ($7.1bn) a year earlier. Customer deposits in 2015 stood at AD17bn ($4.6bn), an increase from AD14.6bn ($4bn) in 2014. Profits for 2015 amounted to AD409.9m ($111.6m) compared with AD377.2m ($102.7m) in 2014. Assets rose further to AD31.8bn ($8.7bn) as marked at the end of September 2016, while profits for the first nine months of the year stood at AD333.8m ($90.9m), up from AD298.4m ($81.2m) in the same period a year earlier.

The sources of this are varied. “All segments have been driving profits growth, including our subsidiaries,” Ahmed Saad, the bank’s deputy CEO, told OBG. He noted that ASAS Real Estate recently handed over a major project which is boosting the bank’s returns. “We will continue to invest in similar projects in the future and have recurrent income from real estate,” he said. The bank likewise saw strong growth in returns on proprietary investment. “We are very active in primary and secondary sukuk (Islamic bond) markets worldwide,” Saad told OBG. The institution’s net profit margin was down slightly in the first half of 2016, compared to the same period in 2015, due to a slight rise in funding costs to 2% above the industry average – a figure Saad said he believed would remain above 2% in 2017, though this is manageable. “Even if funding costs rise further, asset income will also rise,” he said.

The bank’s current growth strategy is based on maintaining diversity across its three main business segments – namely, retail banking, corporate and government banking, and investment banking. Saad told OBG he thought corporate and government business would be the main drivers of expansion in 2017. “There are a great deal of government projects in need of financing at the moment,” he told OBG. The bank is also seeking to diversify its funding sources across four areas – deposits, equity, sukuk and syndication – while also diversifying its deposit base across the UAE to reduce concentration risk. In 2006 the bank became the first Sharjah-based entity to access the international sukuk market. Since then, the institution has returned to the market four times, most recently in September 2016 with an issue worth $500m. That brought the total amount of outstanding sukuk volume of $1.5bn, and the institution currently has AD3bn ($816.8m) worth of sukuk approved (see analysis).

UNITED ARAB BANK: UAB was also founded in 1975. Traditionally a corporate bank, the institution entered the retail and SME market in 2008; however, it is currently reducing its exposure to these segments and returning to its corporate-focused roots. Although it is a conventional institution, the bank also offers sharia-compliant products to its customers. The largest shareholder in the firm is the Commercial Bank of Qatar with a 40% holding that it acquired in 2007, giving rise to one of only a handful of cross-border banking alliances in the GCC. The bank’s shares are also traded on the ADX, with 51.1% of its total capital held by Emiratis.

UAB had total assets worth AD23.7bn ($6.5bn) in 2015, down from AD25.7bn ($7bn) the previous year. Customer deposits were also down, from AD18.7bn ($5.1bn) in 2014 to AD16.8bn ($4.6bn) in 2015, while the bank recorded a net loss of AD166.2m ($45.2m), compared to a profit of AD605.4m ($164.8m) in 2014. Anthony Murphy, CFO and head of strategy at UAB, stated that the bank had incurred a loss primarily due to proactive provisions against loans primarily to the SME sector. “The year 2015 proved a challenging period for both UAB and the banking sector as a whole due to a combination of factors: a prolonged reduction in the oil price, a local and regional “squeeze” on liquidity and broader US dollar appreciation. These impacted cashflows, and as a result the commercial and SME sectors were hardest hit. While the launch of the new credit bureau and improved bankruptcy legislation will aid both banks and borrowers alike, these initiatives will take time to bed in,” he told OBG, referring to Al Etihad Credit Bureau, launched in November 2014. Assets and deposits fell further during the first nine months of 2016, to AD21.7bn ($5.9bn) and AD14.5bn ($3.9bn), respectively. However, profits for the period improved to AD87.7m ($23.9m), as compared with AD71.8m ($19.5m) for the first nine months of 2015.

BANK OF SHARJAH: Bank of Sharjah is the oldest bank in the emirate, founded in 1973, two years after the establishment of the UAE. As with SIB, Sharjah Asset Management is the largest shareholder in Bank of Sharjah, with a holding of 17.16%, followed by Abu Dhabi-based holding firm Al Saqr United Group with 12.7%. The bank’s shares are also listed on the ADX. The institution owns a range of subsidiaries, including Lebanese bank Emirates Lebanon Bank, in which it has an 80% ownership stake, and a real estate arm, BOS Real Estate, with 100% ownership.

The bank held assets of AD27.6bn ($7.5bn) in 2015, up from AD25.1bn ($6.8bn) a year earlier. Customer deposits were worth AD19.5bn ($5.3bn), up from AD17.8bn ($4.8bn) in 2014. Net profit was down in 2015 at AD250.3m ($68.1m), compared to AD285.9m ($77.8m) in 2014. Its asset base shrank again in the first nine months of 2016, to AD26.1bn ($7.1bn), as did profits, to AD234.3m ($63.8m), from AD277.7m ($75.6m) of profits in the same period of 2015.

INVESTBANK: InvestBank was also established in 1975. Major shareholders include the Dubai-headquartered Emirates Investment Bank with a stake of 14.6% and the firm’s shares are traded on the ADX. In 2014 the bank opened its first branch abroad, in Lebanon.

The institution had assets of AD14.9bn ($4.1bn) at the end of 2015, up from AD13.8bn ($3.8bn) for 2014, and customer deposits of AD10.2bn ($2.8bn). Profits for 2015 were down, however, from AD360.1m ($98m) in 2014 to AD252.2m ($68.7m), primarily as a result of substantially increased net impairment losses. As of the third quarter of 2016, the value of the bank’s assets rose further to AD15.4bn ($4.2bn), with customer deposits also up, at AD11.7bn ($3.2bn). However, profits for the period fell again to AD233.4m ($63.5m), compared to AD270.8m ($73.7m) in the same 2015 period, again due to increased provisions on impaired loans and advances. Sami Rached Farhat, CEO of InvestBank stressed the importance of technology not only to Invest Bank’s future but also the future of the sector as a whole. ”Technology and innovation are critical for the banking industry. I believe there exists potential for Sharjah to develop policies and make the investment environment conducive for software development,” he told OBG.

BRANCH NETWORKS: All 23 Emirati-based banks had at least one branch in Sharjah in 2014, according to latest available figures from the UAE central bank, amounting to a total network of 128 bank branches in the emirate out of 1014 bank branches in the UAE as a whole. All 15 foreign banks with a presence in the UAE also had operations in the emirate, with each of them employing a solitary branch.

SIB had the largest branch network in the emirate of any bank in 2014, with 21 branches. The bank had a total of 28 branches in the UAE as a whole, including three branches in Dubai and two in Abu Dhabi, ranking it the 11th largest bank by branch number in the country. Speaking in December 2016, Saad told OBG that the network had grown to 31 branches, making it the 10th largest bank by branch network in the country, and was in the process of building two more.

UAB followed closely with 27 total branches in total, including seven in Sharjah, nine in Dubai and five in Abu Dhabi. However, Murphy told OBG that the bank was planning to reduce the size of its branch network in order to cut costs, in line with its plans to focus more on its core corporate business, while also ensuring the bank was aligned with the way its customers were opting to engage with the bank, emphasizing the growing trend towards digitalisation – though he stated that the bank fully intended to maintain its physical pan-UAE presence. InvestBank has 16 branches in total, six of which are in Sharjah, while Bank of Sharjah has five, including one in Sharjah and two in Dubai.

Of institutions headquartered outside of Sharjah, Dubai Islamic Bank had the largest branch network in the emirate, with 18 outlets, followed by National Bank of Abu Dhabi with 10 and Union National Bank and Abu Dhabi Islamic Bank with nine each.

COMPETITION & CONSOLIDATION: With 51 banks operating in the UAE as a whole, and a population of around 10m – not all of which is considered to be bankable – and growing regulatory requirements such as plans to move towards Basel III standards pushing up costs, senior industry figures say that consolidation in the sector is inevitable, in particular in smaller banks of the kind that are headquartered in Sharjah. According to Khalifa Mohammed Al Kindi, chairman of the Central Bank of the UAE, consolidation will occur naturally as a result of efforts by the sector to improve efficiencies a response to market conditions. He told OBG, “In this regard, the central bank’s primary role is as a facilitator rather than as a conduit of government policy, which is not surprising given that the government itself plays such a key role in the ownership of those financial institutions.” He went on to say that, “The merger or takeover of a financial institution has unique challenges, particularly if that institution has a large depositor base. The central bank must ensure that any resulting new ownership structure, governance process, product offering and prudential safeguard are suitable and robust enough to solidify intermediation capacity.”

SIB’s Saad said he would view such mergers positively. “There is a need for consolidation among small and medium-sized banks to create solid institutions that can meet regulatory requirements,” he told OBG. He added that he believed this was healthy for what he described as an over-banked financial services market, and would lead to improved lending risks and non-performing asset levels. “The existence of a large number of banks creates excess competition that can lead to banks cutting lending standards, as has happened with the SME market recently.”

LIQUIDITY & FUNDING COSTS: Liquidity in the UAE banking sector tightened in 2015 and 2016 as a result of the fallen oil price and loans growing significantly faster than deposits. Lending grew by 6% in the first 10 months of the year, compared to a rate of 2.1% for deposits, leading banks to increase interest rates to support deposit levels. However, Saad said there was no danger of a serious liquidity shortage. “Neither we at SIB nor the sector will have any liquidity issues in 2017,” he told OBG. “While rates are going up and raising deposits will cost money, the situation is not at all similar to 2008, for example, when banks hiked rates and still could not bring in deposits.”

INSURANCE PREMIUMS: Total underwritten nonlife insurance premiums issued by insurance companies based in Sharjah stood at AD1.1bn ($299.5m) in 2015 according to the UAE Insurance Authority, up from AD938.8m ($255.6m) the previous year, of which AD407.3m ($110.9m) was ceded to reinsurance companies. Premiums in the emirate represented 5.4% of the total premiums for the UAE non-life insurance market during 2015, which stood at AD27.5bn ($7.8bn). The largest non-life market segment in Sharjah was health insurance at AD375.8m ($102.3m), almost all in the form of group health insurance, followed by comprehensive motor insurance, with premiums of AD358.5m ($97.6m).

The value of premiums for total life insurance policies in the emirate, meanwhile, stood at AD751.2m ($204.5m) in 2015, of which AD366.8m ($99.9m) was in the form of individual policies and AD384.4m ($104.7m) in the form of group policies. New life premiums during the year were worth AD169.5m ($46.1m). Segment premiums in the emirate represented 9.6% of the value of total life premiums in the UAE for 2015.

GLOBAL RANKINGS: The value of insurance premiums was equivalent to 2.35% of national GDP in 2015 according to Swiss Re Sigma’s “World Insurance in 2015” report, ranking the UAE the 54th most developed insurance market in the world by the GDP metric, and the third most developed market in the Arab world following Lebanon and Bahrain.

LOCAL INSURANCE COMPANIES: There are two insurance companies headquartered in Sharjah, namely Sharjah Insurance Company (SIC) and Al Buhaira National Insurance Company (ABNIC). Emirate governments tend to give their insurance business to companies headquartered locally, which should help sustain the two companies’ business operations and prevent mergers with firms from other emirates for the foreseeable future, making consolidation unlikely.

ABNIC was established in 1978. Major shareholders in the firm include local holding company Private Investment Group, with a 27.7% stake, Sheikh Abdullah bin Mohammed Al Thani of Qatar with 13.5% and UAB founder Sheikh Faisal bin Sultan Al Qassimi with 12.3%. The firm has also been listed on the ADX since 2005. ABNIC is the larger of the two insurance firms, having collected total premiums of AD618.4m ($168.4m) in 2015 – of which AD331.8m ($90.3m) were ceded to reinsurance companies – up from AD548.4m ($149.3m) a year previously. Profits for 2015 stood at AD34.1m ($9.3m), up from AD26.3m ($7.2m) in 2014. Premiums revenue for the first nine months of 2016 were AD521.6m ($142m), up from AD455.3m ($124m) in the same period a year earlier. Profits for the ninemonth period were also up, to AD45.7m ($12.4m), from AD31.1m ($8.5m) for the same period in 2015.

SIC is the older of the two firms, having been established in 1970, making it the first insurance firm in the UAE. The firm’s largest shareholders are Emirati businessman Ahmed Salim Abdullah Salim Al Hosni, with a share of 25.5% and local holding firm Salim Limited Company with 22.2%; the firm’s shares are also listed on the ADX. The company took in premiums of AD73.6m ($20m) in 2015, down from AD78.1m ($21.3m) the year before, and recorded a net loss of AD13.2m ($3.6m), more than the loss of AD8m ($2.2m) in 2014. Premiums also fell in the first nine months of 2016, to AD52m ($14.2m) from AD54.2m ($14.8m) during the same period of the previous year. However, profits for the period were up, to AD3.8m ($1m) compared to AD2.3m ($626,198) during the first nine months of 2015. Ayman Khamis, general manager of SIC, told OBG that around half of the company’s business comes from the Sharjah government – for example, in the form of insurance for government vehicles and for major assets such as those belonging to state-owned utility firm Sharjah Electricity and Water Authority.

One insurance segment with promising growth prospects is health insurance, Khamis said, a market in which the firm was previously active but withdrew from about five years ago due to financial losses. “We are thinking of becoming involved in the medical sector again as there is a strong likelihood that Sharjah will follow Dubai in making health insurance compulsory, which would create an enormous new market,” he told OBG. Other promising segments worth watching in the future, he said, include travel and property insurance.

CAPITAL MARKETS: Sharjah does not have a stock exchange of its own. However, a number of locally headquartered companies are listed on the ADX and the Dubai Financial Market (DFM). Sharjah Asset Management, the government’s investment arm, in addition to various strategic holdings in local firms, also owns stakes in a variety of companies via the ADX and DFM. Furthermore, both the Sharjah government and SIB periodically issue sukuk, with all currently outstanding instruments listed on the Nasdaq Dubai.

OUTLOOK: Funding costs in the banking sector are rising as US interest rate increases push up global rates and as lower oil prices put pressure on deposits, which may reduce profits in the banking sector in 2017. Lending rates may also fall further as banks continue to pull away from SMEs, though this segment represents only a small proportion of lending at most institutions.

On the other hand, any decision to move towards compulsory health insurance could significantly boost Sharjah’s insurance industry, opening up a major new market for firms headquartered in the emirate.