NBD, EBI merger signals tougher times for the UAE banks

After four boom years the UAE banking sector is concerned about the future. The local stock market went spectacularly bust last year, leaving an estimated $9.8 billion in debts according to Deutsche Bank, which have yet to go bad.

However, the stock market is still flat on its back and shows no sign of recovery, so the banks have to assume that the worst might happen and that these debts will turn bad. Moreover, bankers are cautious folk and can see that a real estate correction is also in the pipeline which is going to have a big impact on some overstretched clients.

Against this background the merger announcement this week from the National Bank of Dubai and Emirates Bank International is the right move to take. Indeed, it was exactly the same move that the two banks announced in 1999 when facing similar stock market conditions and a possible real estate crunch.

Will it happen?

Will the two manage to pull it off this time? The 1999 merger attempt was frustrated by the untimely death of the NBD founder, Sultan Al Owais, one of the UAE's most senior business figures.

But putting two local banks together is not an easy task, although the allocation of the top job has already been settled in favor of EBI. The best solution is a meritocratic analysis of who has been doing the best job and a combination of the best of the best.

EBI has clearly won hands down in the retail banking sector, with its excellent online MeBank, while NBD has greater strengths in the corporate field. So perhaps this time the merger will actually happen. Certainly the enthusiasm of the Dubai Government for the deal will be a considerable factor in its favor.

But expect to see more sudden mergers to create national champions and strengthen balance sheets to meet more difficult times for the banks. It has to be said that the $9.7 billion debt overhang from the recent stock market crash is not far short of the $11 billion US bad debt provision made by HSBC.

Realty downturn

If the UAE banks have to take this as a bad debt they will be poorly placed to handle any fall out from the predicted real estate correction next year. And in banking hasty corporate marriages are usually the result of bad times and not good.

On the other hand, oil is presently priced at $62 a barrel and the flow of cash into the UAE is at a historic high. Under these circumstances there should be plenty of room for the banks to maneuver and preemptive mergers are one solution.

It is also an answer to an increase in competition from the international banks which have a long record of exploiting local banking crises to their advantage around the world.