Analyzing The Banking Sector Of UAE Through Emirates NBD

Pick one of the following companies and analyze it using the Porter’s five forces. No two groups will be allowed to analyze the same company, so one you pick your company, check with the Professor to make sure that company has not been chosen by another company.

i) Gulf General Investment ii) Emirates Investment Bank (iii) Emirate NBD (iv) Etisalat

(v) Dubai Investments PJSC (vi) DAMAC Properties Dubai

Banking Sector of UAE

The banking sector plays a significant role to establish the financial system of a country. The chief feature of this sector is to facilitate the capital flow within the economy. To withdraw salaries, saving for future and paying bill, bank has provided various facilities in almost everyone’s life. The specified sector also monitors financial resources to allocate them efficiently for promoting growth and development of an economy further. The United Arab Emirates (UAE) implies a federation including seven small emirates of Gulf, which are Abu Dhabi, Sharjah, Dubai, Ajman, Fujairah, Ras Al Khaimah and Umm Al Qaiwain. This member country of the Gulf Cooperation Council (GCC) captures the world market through exporting oil and gas in other countries. The chief purpose of this report is to analyse the banking sector of the UAE by focusing on the Emirates NBD and its activities. Before analysing this bank briefly with the help of Porter’s Five Forces, the report discusses about the banking sector of the UAE.

The UAE has been considered as the main financial hub across the Middle East. The UAE Central Bank, established in 1980, regulates the entire banking industry with its credit, monetary and banking policies. Moreover, this apex bank also supervises policy implementation based on the general policy of the state in such a way that these implemented policies can help to stabilize the national currency and develop the national economy (Al-Tamimi, Lafi and Uddin). Emirates NBD or the National Bank of Dubai was established in 2007 after its shares were listed officially on the Dubai Financial Market (DFM) (Douissa and Azrak). After merging of the National Bank of Dubai (NBD) with Emirates Bank International (EBI), the Emirates NBD was formed and gradually became a regional blueprint for financial and banking sector. The bank delivers comparatively better services through retail, corporate, Islamic, private and investment banking system around the region. The group operates across the Emirates along with Egypt, Singapore and the United Kingdom while its representative offices are situated in China, India and Indonesia as well. In addition to this, the group has many companies, which operate in the banking and financial sectors. As of 2018, total asset of this Dubai based bank is AED 477.5 Billion, which is almost USD 130 Billion.

The fragmented banking sector of the UAE has 23 domestic banks along with 28 foreign banks that operate their financial business across the country. The Emirates has seven foreign banks from France, Britain and the United States while other foreign banks belong to the North Africa, Middle East and South Asia. Thus, the entire sector can be divided into four broad categories, viz. investment, commercial, industrial and Islamic banks. Most of the banks, situated in Dubai and Abu Dhabi keep a maximum share of the entire domestic assets. As of 2017, maximum share of this sector’s gross national product comes from local 23 licensed banks.

Emirates NBD: A Brief Overview

In recent years, Islamic banks have expanded significantly and consequently have become an important factor in the entire banking industry of the UAE. At present, seven Islamic banks operate their financial business throughout the country (Akhtar, Akhter and Shahbaz). Moreover, some conventional banks offer financial services along with Islamic banking. Conventionally, trade and building sectors get a maximum share of the loans from banks. The chief reason for this advantage received by the trade and building sectors is that investment scope in other sectors is very low.

Since 2015, the oil prices have decreased in the international market and this, in turn has reduced economic growth of this country due to drastic fall in government projects and a reformation of the private business sectors through affecting the profitability, liquidity and quality of asset of local financial institutions (Chattha and Alhabshi). In addition to this, the number of employees working in this sector along with the number of branches of local and foreign licensed banks has declined significantly due to the cost reduction strategy of these banks.

Moreover, during the global financial crisis of 2008, non-performing loans created a huge burden for most of the Emirati banks. In some cases, borrowers fled from the country after becoming a defaulter. After that, the federal government took initiatives and gave guarantee for all deposits deposited in the local banks (Abedifar, Ebrahim, Molyneux and Tarazi). Profitability in the banking sector of this country suffered significantly after the financial crisis though fee revenues and core interest remained comparatively high. However, the liquidity support process of the Federal Government helped banking sector to stabilize their system during 2009. Moreover, banks situated in Abu Dhabi received federal support by Tier 1 level of capital funding to AED 16 billion. The entire amount was distributed among four major banks in the UAE. In addition to this, capital adequacy ratios of these banks strengthened this year with the help of some government actions, maintenance of net income and decreasing risk-weighted assets. Total capital ratios and the Tier 1 level of average regulatory were remained higher than the regulatory requirements and in some situations; it exceeded 20% which consequently strengthen these banks to absorb Non-performing loans (NPL) for the next 1 year to 2 years. Asset quality also deteriorated in 2009 and the trend continued in the next year.  

• Non-performing loan: Nonperforming loan represents a total of borrowed money that debtor has not paid during a long period, say, minimum 90 days. Hence, the loan receives zero principal or interest within a specified period.

The banking sector in the UAE operates in a competitive market. The increasing cost of domestic deposits in this market and declined access to capital market related to international debt have made some vital challenges to fuel the banking sector along with resources for matching the motivated development plans of the country. Thus, for the banking sector, it is essential to know how market sectors and customers contribute to gaining profits. For stabilizing the banking sector after the 2008-2009, banks have focused on some key issues, which are, concentration on deposits and loans, limited availability of data, a high proportion of related party exposures and stiff industry competition. In addition to this, recovering construction sectors along with real estate have limited the performance of the Emirati banks. However, most of the banks have successfully maintained a strong existence in their respective local markets. As a result, the banking sector has experienced limited diversification and showed concentration regarding products, geographies and customers.

Challenges in Banking Sector of UAE

Thus, it is said that most of the banks in the UAE have benefited by the local government based on its strong ownership structure. Most of the banks are trying to restructure their loans problems. Moreover, Dubai has improved its economic condition for the last few years through improving some key sectors, such as trade, real estate, tourism and services. This would decline stress in the medium term loans of the banking sector. Hence, some chief characteristics of the UAE banking sector are i) strong capitalization, ii) strong relationship with local governments, iii) dependence on global macroeconomic conditions and oil prices, iv) weak asset quality, v) high competition and vi) limited credit differentiation. To analyse the sector more precisely for understanding its competitive strategy, Porter’s 5 Forces model will be analysed on the Emirates NBD. This is because Porter’s model has become a useful tool to analyse the industry structure and corporate structure of a company.

The model has been developed on five competitive forces that can outline every market and industry. These five forces are threats of new entrants, power of buyers, power of suppliers, substitute availability and rivalry competition (Gans and Ryall). These forces can analyse an industry’s intention of competition, attractiveness and profitability. Through discussing these factors in the context of Emirates NBD, one can understand the corporate structure of the UAE banking industry. At present, organisational structure of this bank is very high. The bank receives profitable outcome from its large domestic market due to the merger of two large banks. The key strength of this specified bank is based on capability to provide various types of financial solutions to monetary organisations. The bank has 140 branches along with 750 ATMs across the world. The Emirates NBD emerges its business significantly due to its diversified nature. However, the bank also experiences challenges to expand business overseas. Thus, the bank has limited share in international market, as the bank has few branches all over the world. Therefore, to improve the brand, Emirates NBD needs to expand its business in other countries. The bank also experiences various threats to the business that can be explained briefly with the help of Porter’s five forces.

Figure 1: Porter’s Five Forces Model

Source: (Gans and Ryall)

The government of a country can generate effective barriers to restrict entry of banks in the sector through implementing legislation. Hence, the government in most of the countries take final decision regarding openness of the sector. One of the important way to enter into the new market is to obtain new customers from oversees. In some countries, customers rely on foreign banks due to high interest rate, long queue, mortgage loans and higher tax in personal saving in domestic market (Igan, Mirzaei and Moore). If the government does not create any barriers by imposing regulation, licenses and law then new competitors can enter into the market without experiencing any bureaucratic procedure to establish a new bank.

Porter’s Five Forces Model for Emirates NBD

As the UAE banking sector operates in the competitive market, almost each bank experiences strong challenges to execute their business due to the threats generated from the new entrance. To enter in this industry, a bank needs huge regulatory and capital requirement. According to FDIC, 215 banks were formed during 1977 and 2002. However, at present, the probability of entering new banks into the banking sector of the UAE is very low. Various new factors have adversely influenced these new banks to start their business while government licensing also creates difficulties for the banking sector to open a new venture in the UAE market. In addition to this, lack of skilled employees has generated challenges for the banking sector to star new business. Emirates NBD captures the leading position in banking industry through providing different types of financial solution (Balhareth). To establish a financial organisation, huge amount of investment is required and this in turn can restrict new banks to enter into the market. Existing domestic banks have faced trouble due to the entry of foreign banks. However, most of the foreign countries do not want to expand their banking operations in this country due to strict regulations and legislations of the government. As a result, this helps domestic banks to execute their business through an efficient way.

The bargaining power of the buyers is comparatively high due to various factors such as mortgage loans, customer deposits, loans and mortgage securities. At present, the UAE banking sector is receiving huge amount of investment revenues and this in turn influence the buyers to bargain for a better option. On the contrary, buyers can bargain with financial institutions for receiving the higher interest rates. Emirates NBD have significant brand value in domestic market though buyers have alternative options as well. This implies that buyers have higher bargaining power. The undiversified services have generated provided customers higher bargaining power. Moreover, lower cost to switch from one bank to other can influence the buyers to change its financial institution accordingly if they receive low values from the specified bank. During the period of recession, the bank has also experienced various challenges when most of the customers have cancelled their accounts. This further has affected the business. However, Emirates NBD has diverse products that have helped the bank to uphold high base of customers in business. Through using technology, customers can receive information on various services provided by other banks in the UAE. Thus, customers can easily identify banks, which are providing best services and consequently can chose the best bank for them.

The banking sector in this country follows all rules and regulations imposed by the central bank. As a result, suppliers cannot bargain at a higher rate. In this context, suppliers of a bank mean depositors, who deposit their excess money in bank for safety and earning income from interest rate. In the UAE banking sector, suppliers possess comparatively low bargaining power due to various factors, such as nature of suppliers, legislation of the central bank, few alternatives and non-concentrated suppliers. Due to higher brand value of Emirates NBD, the suppliers try to avoid conflict in the process of business making. Those suppliers prefer comparatively lower risks. In addition to this, suppliers have limited alternatives that can provide different types of financial solutions. As a result, suppliers apply comparatively lower bargaining power to engage with the organisation for long term. The chief reason of low bargaining power is that suppliers cannot bargain interest rate as it is implemented by the central bank. Thus, it can be said that suppliers’ low bargaining power can facilitate Emirates NBD to increase business opportunities within the domestic market.

In recent years, most of the companies in each sector compete with each other for reducing cost and getting higher service along with higher turnover and higher performance and so on.

Due to imposition of new policy, the financial sector in the UAE has developed significantly. Moreover, product invention within this sector has also increased and consequently, banks in this country are not restricted with the procedure of traditional business making. Emirates NBD provides an extensive range of products and services that are unique for clients. The organisation gives importance on the product substitution. Substitute products provide same level of satisfaction to customers but they are different with each other. Emirates NBD have different types of financial solutions for the country’s monetary organisations. Some of important financial products in the Emirates are credit card, home finance, personal finance and loans for purchasing cars. Hence, through analyzing the present situation of the UAE banking sector, it can be stated that some non-banking financial sectors have developed in an effective way to represent a risk factor for all existing originations. On the contrary, the stock market acts as the substitute product of the financial sector (Menacer and Nurein). Customers sometimes invest huge amount of money in this stock market to receive adequate outcomes. However, substitutes also include various threats though these organisations receive large base of customers through delivering some unique financial solutions.

At present, Emirates NBD is facing various problems due to increasing threats from strong competitors. Moreover, higher market growth has led some banks to have trouble to executing their business. Hence, maximum banks intend to provide new offers to their new customers to attract them. In addition to this, customers bear lower costs to shift from one bank to other. As a result, customer base for these banks can reduce significantly. In some situations, high exit barriers of some banks negatively influence the customers to connect with these banks. Emirates NBD have various competitors, such as Bank of Sharjah, Abu Dhabi Islamic Bank and Mashreqbank psc. In the competitive market, an organisation implements various strategic approaches to increase the business opportunities through an effective way. According to the management of the bank, cost volatility generates several challenges to retain customers during the long period. Despite of these threats, Emirates NBD maintains a strong presence in its domestic market.

Thus, after analysing Porter’s Five Forces model, it can be said that bargaining power of buyers and competitive rivalry have important impacts on the banking sector while other forces, which are, threats related to new entrants, suppliers’ bargaining power and  availability of substitutes have comparatively lower impacts on this sector. However, the bank can improve its condition in foreign market by applying various strategic approaches such as realignment of business, channel optimisation, technology along with automation and productivity of staff.

Conclusion:

Thus, in conclusion, it can be said that the banking sector on the UAE has obtained huge economic importance across the Middle East. Most of the banks, situated in Dubai and Abu Dhabi, generate maximum resources in the banking sector. The central bank monitors the entire banking sector through implementing monetary, banking and credit policies. Hence, the bank has huge significance in this sector as it also supervises implemented policies of the state to stabilise the currency within the economy and to develop the country. The UAE banking sector contains both domestic banks and foreign banks (Sallam). The entire emirates have seven foreign banks across the world. However, the local banks play chief financial operations. Emirates NBD are the leading bank that provides various financial services to its customers for attracting them. As the entire banking system of the UAE operates under a competitive market, analysis of Porter’s Five Forces Model is essential. This analysis is conducted on the Emirates NBD to understand the entire situation of the industry. The National Bank of Dubai merges with the Emirates Bank International to form the Emirates NBD. The Porter’s model helps to understand every market through analysing intention of the industry to compete, profitability and attractiveness. These fiver forces discuss about threat related to new entrance, powers of buyers and suppliers, availability of substitutes and rivalry competition. Due to strict rules of the government, new banks cannot enter into the industry easily. Moreover, insufficient number of skilled workers and higher investment at starting phase of the business has adversely affected any new ventures to enter into the industry. However, entry of foreign banks has created some threats but this is low. On the contrary, buyers enjoy higher bargaining power by negotiating interest rates. However, suppliers enjoy comparatively less power to influence interest rate of the bank due to strict rules of the central bank. Hence, this force cannot influence the banking industry by large extend. In addition to this, the availability of substitute products in industry is very low. However, people invest their money in stock market.

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