Standard Chartered points to rising competition as margins tighten

Competition in the country's banking sector is intensifying, particularly when it comes to trade finance, according to the UAE chief executive of Standard Chartered.

“The margins are compressing quite a bit despite volumes going up,” said Mohsin Ali Nathani, whose bank reported a decline of US$35 million in operating profit to $289m for its local business in the first hafl. “Margins are down 20 to 25 basis points, [which is] a reduction of 12 per cent to 15 per cent.”

Pretax profit for the group dropped 20 per cent to $3.3 billion in the first half.

He said banks flush with cash amid a booming economy were carefully deploying their assets to generate profits in the UAE, which is the fifth-biggest market for the London-based lender in terms of revenue.

The UAE’s upgrade to emerging-market status, along with Dubai’s winning bid to host the Expo 2020, has attracted liquidity that had been sitting on the sidelines after the 2008 global financial crisis and that money is being channelled intro infrastructure and property projects.

The UAE’s GDP is expected to grow in excess of 4.5 per cent this year, according to the IMF. Property prices have rocketed 36 per cent year on year in the second quarter of this year, according to the latest report from Jones Lang La Salle. Foreign direct investment rose 9 per cent to $10.5bn last year, according to the United Nations conference on trade and development.

Despite sizeable opportunities provided by the economy, the UAE has an overcrowded banking sector with 51 lenders in operation.

While analysts have described the market as ripe for consolidation, Mr Nathani sees more scope for mergers and acquisitions activity in the sector.

“I’m not sure about consolidation but I could see some banks selling some of their businesses,” Mr Nathani said.

Last year, FGB acquired the card payment company Dubai First for $163m, while Barclays put its retail business up for sale. Other examples include HSBC’s acquisition of Lloyds TSB Middle East in 2012, in which the bank gained a single branch but acquired a loan book of $573m and about 8,800 commercial and individual customers.

Lenders have adjusted their portfolios to comply with a Central Bank regulation that caps lending to governments and state-owned companies.

Local lenders such as National Bank of Abu Dhabi and FGB are expanding their geographic footprint to capture trade flowing through the Middle East from Asia to Africa, an arena previously dominated by international banks.

“Our strategy is to focus on areas where the local banks are lacking, where we can get the most value, pricing and return,” Mr Nathani said.

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