The Gulf states were already struggling with half a decade of low oil prices before Covid-19 struck. Now the pandemic is putting their economies and sovereign balance sheets under further pressure.
Lockdowns have closed the region’s glittering shopping malls. And while the United Arab Emirates is relatively less exposed to the renewed oil-price fall since March, it is the most exposed to the global collapse in air travel, given its role as the region’s financial and tourism hub.
To tackle the crisis at home, the UAE central bank has granted regulatory forbearance and capital relief, as well as free liquidity, to help banks extend payment deferrals to their retail and corporate borrowers.
In November, the central bank extended the programme until June 2021.
Deferrals under the programme at FAB, the UAE’s biggest lender, totalled Dh7.5 billion ($2 billion) in the third-quarter results.
Safe haven
In these tough times FAB’s links to the government of the UAE’s richest emirate, Abu Dhabi, have made it a safe haven and brought about more scope for growth.
It’s not just that FAB has a state-owned entity, Mubadala, as its controlling shareholder – that is normal in the Gulf – it has also inherited a role as the government’s house bank from National Bank of Abu Dhabi, which merged in 2017 with First Gulf Bank, a successful retail lender that was at the time the country’s third-largest lender.
The public sector already accounts for a third of FAB’s loan book, according to research from Arqaam Capital.
It speaks to the firm’s prominence in the country today that its former chief executive, Abdulhamid Saeed, has been UAE central bank governor since April.
Sayegh, formerly deputy chief executive, stepped up to the top job early in 2020.
FAB’s status as Abu Dhabi’s national champion gives it useful cost of funding and business advantages, which are even more important post-Covid. Its share price has consequently held up much better than peers in 2020, leaving it with a price-to-book ratio at the end of November of 1.7 times, compared with a UAE average of 1.1, according to CI Capital.
In these tough times FAB’s links to the government of the UAE’s richest emirate, Abu Dhabi, have made it a safe haven
Looking to 2021 and beyond, Abu Dhabi’s state and state-linked entities will have even more scope now to invest relative to private firms.
The government is accelerating infrastructure development to boost its Covid-ravaged economy. Abu Dhabi National Oil Company is embarking on a €122 billion capital expenditure plan over the next five years.
FAB naturally expects to get a big share of the relatively safe banking business that will come from these projects.
Synergies from the 2017 merger in part mean FAB has a slightly lower cost-to-income ratio than its peers, about 28%, according to CI Capital estimates for 2020. Its return on equity, at around 11%, is average for the sector.
However, its loan-to-deposit ratio (77%) is much lower than that of rivals, whose deposits are generally roughly balanced with loans. Furthermore, its non-performing loan ratio (4.2%) is lower than average.
Such strength in adversity means Covid-19 has done little to dent FAB’s regional ambitions.
International business accounts for about a quarter of its loan book today, which is higher than any other UAE bank.
FAB is still set to benefit from the UAE’s economic and military alliances with Egypt and Saudi Arabia. Qatar’s isolation by these Arab neighbours might be easing, but it will be some time before Qatar National Bank – FAB’s biggest regional rival – finds it as easy to expand in other large regional banking markets.
FAB’s chairman is Sheikh Tahnoon Bin Zayed Al Nahyan, son of the UAE’s founder, and its national security adviser.
FAB’s expansion in Saudi Arabia continued in early 2020 with the opening of a branch in Jeddah, following Riyadh in 2019. Later in the year the Lebanese currency and banking crisis led to exclusive discussions with Lebanon’s biggest bank, Bank Audi, over the latter’s operations in Egypt – previously the cornerstone of that bank’s now much-humbled international story.
Plans by FAB to carve out its payments business, meanwhile, are another element of its international growth, as the business, which will still be fully owned, has regional ambitions.
The payments business is focused on direct acquiring, issuer processing and acquiring processing, and hopes to connect FAB’s network and scale with the growing ecosystem of fintech providers in the region.
In a similar vein, it made the decision in October to transfer the legacy banking licence of First Gulf Bank to a new digital banking project launched by Abu Dhabi investment company ADQ. In exchange FAB will receive a 10% stake in the new venture, which it can increase with preferential access to 20% if ADQ decides to list it.
