The UAE's banking sector is well equipped to deal with global and domestic stress scenarios and has handled recent global financial turmoil comparatively well, according to The Financial Stability Report, issued in 2012 by the UAE Central Bank. Banks' high capital adequacy levels, together with robust provisioning policies and high profitability, it stated, enhance their capability to cope with major challenges. Looking to the future, it predicted that the UAE banking system will continue to show a high level of resilience due to its conservative, traditional banking model, which has a strong focus on the UAE; sound financial indicators; low dependence on overseas funding; a capped real estate exposure; and a high loss absorbent capability as demonstrated by stress testing.
At present, the Financial Stability Report explained, advances to stable resources ratio (ASRR) is currently the only regulatory ratio related to liquidity with which banks must comply. This ratio indicates the level of stable resources being held by banks to back their advances. Banks operating in the UAE are required not to exceed an ASRR of 100 per cent. The increase in credit growth in 2008 had pushed the ASRR to almost 100 per cent by the end of that year. A correction took place in 2009 that helped to reduce the ratio to 89.6 per cent. As of December 2011, the ASRR stood at 88 per cent supported by the substantial holding of stable resources and moderate credit growth. The improvement on ASSR, the report stated, was due to a slowdown in credit demand and tight credit standards by banks. Banks' loan to deposit ratio reached 106.8 per cent as of December 2011, compared to 110.5 per cent as of December 2008.
Central Bank figures listed UAE bank assets at Dh1,791.6 billion at the end of 2012, down by 0.2 per cent in December 2012 but up 7.8 per cent year-on-year. Deposits with the country's 23 national and 28 foreign banks also decreased by 1.3 per cent to Dh1,167.8 billion during the month of December, but again recording a year-on-year increase of 9.2 per cent. Although loans and advances were down by 0.7 per cent to Dh1,099 billion in December, this sector registered a modest year-on-year growth of 2.6 per cent. Specific provisions for non-performing loans amounted to Dh61.9 billion at the end of 2012, up 22.8 per cent on 2011.
As the UAE is an emerging economy and in order to mitigate the concentration of risk due to the high share of Government-related entities (GREs) in the economy, the Central Bank requires banks to hold capital in excess of the Basel Committee recommendation. At the end of 2012, the capital adequacy ratio of UAE banks (Tier 1 + Tier 2) was 21 per cent, of which Tier 1 was 17.6 per cent. This buffer introduces a significant level of comfort to UAE-based banks, especially national banks. As issues with major corporate entities are being resolved through either the rescheduling or restructuring of part of their loans, having a sizeable capital buffer in place, the Central Bank believes, will help to reduce the impact of any adverse outcome.
The Financial Stability Report 2012 highlighted the fact that the UAE banking system was able to maintain sound levels of profit even during periods of stress. Banks had a total profit of Dh26.6 billion during 2011, compared to Dh22.5 billion during 2010. As a result, it stated, return on assets increased to 1.54 per cent during 2011 versus 1.36 per cent for 2010. The increase in profits during 2011 was mainly driven by the increase in banks' net interest margins.
In 2012 the net earnings of the 17 national banks listed on the UAE bourse increased by around 11.4 per cent, helped by the upturn in the domestic economy. Most banks performed well with the exception of government-controlled Abu Dhabi Commercial Bank (ADCB), which reported lower earnings. Emirates NBD, the largest bank in the UAE, reported net profits remained unchanged, while the earnings of Dubai Islamic Bank and Bank of Umm al-Qaiwain were also stable. National Bank of Abu Dhabi, also controlled by the government, recorded the highest profits of Dh4.3 billion in 2012, followed by Abu Dhabi's First Gulf Bank, with Dh4.1 billion. ADCB came third with Dh2.7 billion, while Emirates NBD netted the fourth highest income of Dh2.5 billion.
The UAE Central Bank reports that daily average values traded on the UAE stock markets experienced a generalised decline during 2010 and 2011. The general share price index decreased by 11.8 per cent, while market capitalisation decreased by 10.2 per cent from Dh385.4 billion at the end of 2010 to Dh346.1 billion at the end of 2011. An historic low was set in November 2011 with average daily trading of Dh120 million.
However, figures released by the Securities and Commodities Authority (SCA) on the Emirates Securities Market (ESM) performance for 2012 record an upward trend in UAE stock markets in 2012. Dubai Financial Market (DFM), up 20 per cent, led the recovery in this sector, followed by Abu Dhabi Securities Exchange (ADX) at 9.5 per cent. DFM was the star performer in the GCC stock market indices in 2012. This upward trend is continuing in 2013 as the UAE economy is projected to grow by 4 per cent, driven by government spending in new projects and marked growth in key sectors like tourism and trade, as well as a tangible resurgence in the real estate sector. By mid-May 2013, the benchmark DFM General Index had risen to its highest level since 2009 whilst the ADX General Index was at its highest level since November 2008. New organisational, supervisory and legislative measures introduced by SCA in 2012, such as the stock lending and borrowing scheme, margin trading, short selling, market maker and liquidity provider, will assist the market to attract more liquidity.
Compliance by public joint stock companies with disclosure and governance regulations rose to 98 per cent, increasing market confidence and attracting foreign investment. Figures showed that net foreign investment inflow in the twin stock markets in Abu Dhabi and Dubai increased by 568 per cent in 2012.
The Central Bank also stresses that it is regularly reviewing and upgrading regulations to ensure a sound and robust financial system. Some of these developments are reviewed by the WEF Financial Development Report 2012 in which the UAE was ranked twenty-sixth of 62 countries whose financial systems were analysed. The report focuses on the drivers of financial system development in advanced and emerging economies so that countries can benchmark themselves and establish priorities for reform. The rankings are based on over 120 variables spanning institutional and business environments, financial stability, and size and depth of capital markets, among other factors.
Abu Dhabi Securities Exchange
Established in 2000, ADX is a focal point for UAE-listed companies, investment funds and debt instruments, providing investors with an opportunity to invest capital for the benefit of the national economy. ADX has opened impressive new offices in Sowwah Square on Al Maryah Island, Abu Dhabi and also has branches in Fujairah, Ra’s al-Khaimah, Sharjah and Zayed City.
Dubai Financial Market
Also established in 2000, DFM is operating as a secondary market for trading of securities issued by public joint-stock companies, bonds issued by the Federal Government or any of the Local Governments and public institutions in the country, units of investment funds and any other financial instruments, local or foreign, which are accepted by the Market.
Opened in 2005, Nasdaq Dubai is an international stock exchange operating between western Europe and east Asia offering trading in equities, derivatives, Dubai gold securities, Islamic securities, debt, funds, REITs, ETFs and structured products.
FTSE NASDAQ Dubai
The FTSE NASDAQ Dubai UAE 20 index comprises 20 stocks admitted to trading on NASDAQ Dubai, the Dubai Financial Market (DFM) and the Abu Dhabi Securities Exchange (ADX). Futures based on the index are admitted for trading on NASDAQ Dubai and are designed to provide a hedging and investment mechanism for GCC and international investors.
Created in 2007, Borse Dubai is the holding company for Dubai Financial Market (DFM) and NASDAQ Dubai. Borse Dubai consolidates the Government of Dubai’s two stock exchanges as well as current investments in other exchanges.
Dubai Mercantile Exchange
The DME is the premier international energy futures and commodities exchange in the Middle East. The Exchange has developed and trades the DME Oman Crude Oil Futures Contract. The DME is a fully electronic exchange, and its contracts are listed on CME Globex
Dubai Gold and Commodities Exchange
DGCX, an initiative of the Dubai Multi Commodities Centre (DMCC), Financial Technologies (India) Limited and the Multi Commodity Exchange of India Limited (MCX). commenced trading in 2005 as the region’s first commodity derivatives exchange and has become the leading derivatives exchange in the Middle East.