Performance Analysis Of Conventional Banks In The United Arab Emirates

Theoretical Background

With the advent of globalisation, demands of customers have been showing significant changes. The biggest change that globalisation has brought is commercialization which increased the immense competition in the market. A new culture of cut-throat competition has emerged. In order to sustain in the market companies, need to very innovative and ready to serve the immediate demands of its customers. There are seven small but well-developed gulf emirates: Sharjah, Abu Dhabi, Umm Al Qaiwain. Fujairah and Khaimah which completes the United Arab Emirates (UAE). UAE is traditionally an oil and gas exploration nation which fulfils the petroleum needs of the entire globe. UAE is moving towards to become the leader in financial and service sector of the middle east. The financial sector has also witnessed the dynamic needs of the customers. Conventional methods are no longer helpful in maintaining survival in the market. The banking sector in UEA is a very fragmented sector. There are more than 50 foreign and domestic banks are serving the banking needs of entire UAE. Initially, banking sector of UAE was restricted for foreign banks but after removal of such restriction number of foreign banks has significantly increased. UAE banking sector regulates and governs the entire banking sector in UAE and gears growth and healthy banking practices in UAE. UAE banking sector has also grown drastically after the globalisation and is gearing up for global competition. The main purpose of this study is to analyse the performance of the UAE Conventional National Banks. For this, Union National Bank and NBQ Bank.  

Ratios are being used to compare the financial as well as the market performance of both the banks. Conventional banks in UAE dominates the market and gives tough competition to the foreign banks. Annual reports for the financial year 2014 and 2015 have been considered for such analysis. Empirical analysis has been conducted to compare the performance of these two banks. With the help of literature review, theoretical background of conventional banks has been discussed (Tracy, 2012). On the basis of the analysis, conclusion along with some recommendation has been quoted at the end of the report. 

The literature review provides a theoretical background of the research study. This chapter will explain the overall performance of conventional banks in UAE. Global financial crisis 2007-08 had brought many reforms in the finance and banking sector globally. Many studies have been conducted to analyse the performance of Islamic conventional banks so far. These studies attempted to investigate the banking practices, their risk level and financial performance of conventional banks during the economic crisis. The collision of Lehman Brothers stunned the whole world and weakened the world’s strongest economy. While all the developed economies were struggling, Islamic banking sector was unaffected by such destruction (Wang, 2009). Financial ratios are extensively used to measure and examine the performance of conventional banks of UAE. Financial ratios are easy to calculate and understand. Profitability ratios represent the profit earning capacity of the firm in the given time period. Liquidity ratio measures the efficiency to convert its liquid assets into cash Wum et al., (2007) evaluated the performance of the conventional banks by using financial interrelation ratio (FIR). Monetization has been measured by the GDP and the level of size, the age of the banks and capitalization. They have concluded that there is a significant impact of GDP over the performance of the banks. Banking sector needs more development and regulation which will enhance their ROA performance (Wum, Ling, Chen and Shiu, 2007).  Ashraf and Masood also inspected the conventional banks and their role in the development of micro-economy by comparing the profitability of 25 Islamic banks. They have disclosed that the asset size of the banks has an impact on the performance of the banks. As assets are the landings and investments of banks which are the primary source of revenue for the banks. Hence, it must be better enough. Management of banks also plays a significant role in the growth and survival of the banks. Increasing competition is a new concern for the conventional banks. In order to attain sustainable growth, they need to be more technology friendly and proactive towards the market demand (Masood & Ashraf, 2012).

Research Methodology

Unal et al., (2007) analysed the performance of the conventional banks. He used the net and gross profit, return on equity and return on assets ratios for his analysis. Operating efficiency of the banks has been analysed with the help of operating ratios. He concluded that conventional banks are as efficient as foreign banks in UAE. Banking sector of UAE. Most of the researcher have referred to the financial ratios to examine and analyse the performance of the banks. The best feature of the financial ratio is that they are an ideal method for the comparison of financial data with past performance (Unal, Aktas & Acikaline, Sezgin, 2007). Erol et al., (2017) has investigated that market credulity of the conventional banks in UAE. They concluded that Convectional banks in UAE dominates the banking sectors and are very popular among people. Management of such banks is very competent and active towards accepting market challenges. They emphasis on innovation and committed to delivering valuable services to their customers (Erol, 2017).

The purpose of the Study

Research methodology highlights the tools and techniques which have been used to gain information about the research topic. In the view of Creswell, (2016) research methodology is a process of defining the complete framework for executing the research philosophy which includes the research design, data collection method for collecting data and approach used to complete the research. it helps to drive the solution through extensive research practices. The prime purpose of this research is to analyse and examine the performance of the conventional banks in UAE. Ratio analysis has been selected to compare the financial performance of the Union National Bank and NBQ.

The Scope of the Study

Every research study should have some significance in its field. This research study comprises the study of the performance of conventional banks in UAE. UAE is the most developed economy in the middle east. Domestic banks dominate the banking sector of UAE and give a tough competition to the foreign banks. This research study highlights the financial performance of the conventional banks in UAE. Union National Bank and NBQ have been selected and their financial analysis is compared. Ratio analysis has been conducted to analyse the performance of the banks.

Sources of Data

Sources of collected data must be authenticated and reliable. The quality of collected data authenticates the originality and true efforts of the writer. There are two types of data namely, primary and secondary. Primary data are more accurate and reliable as the researcher himself collect data through various surveys and interviews. Secondary data are those data which have been collected prior the study by another researcher. Secondary data are less reliable than primary data as the sole purpose for data collection in secondary data differ researcher to researcher. In order to conduct this research study, secondary data has been used. However, all the secondary sources are reliable and authenticated. Annual reports of NBQ and Union National Bank has been used for the financial comparison. 

Methods and Techniques Adopted in the Study

Research method and techniques define the approach of a research study which is used to gain knowledge and data on the research topic. It explains the objective of researcher to collect the data and drawing conceptual knowledge out of it. Research method and techniques guides the researcher in attaining the research objectives. In this context, research method and research approach is divided into inductive and deductive. As per the deductive approach, the main aim of the researcher is testing the available information, study and theories with the help of scientific principles and methods. In Contrary, inductive approach concentrates on the discovery of new theories and facts by applying some specific observations which he has gained.

About Union National Bank 

Union National Bank is one of the leading domestic public joint stock company which was established in the year 1982. It is headquartered in Abu Dhabi. UNB is very well known for its innovative and wide variety of products and services. It is popular among both corporate and individual customers (Bienias, Lehman & Gentene, 2013). Electronic delivery channels of UNB and other banking channels across United Arab Emirates. UNB has acquired Alexandria Commercial and Maritime Bank in the year 2006. It operates through 56 branches in UAE.

National Bank of Umm Al Qaiwain (NBQ)

The National Bank of Umm Al Qaiwain (NBQ) was founded by H.H. Sheikh Rashid Bin Ahmed Al Moalla ruler of Umm Al Qaiwain, in the year 1982. The largest promoter and shareholder of NBQ is the government of Umm Al Qaiwain itself. In the year 2005, name of the bank changed to NBQ. NBQ operates in seven Emirates states by its 16 trade channels.

This section of research study consists the financial analysis of Union National Bank and NBQ. Ratio analysis has been conducted to compare the financial performance as well as market performance of the banks. Profitability ratios, Debt equity ratio and investment ratios have been used to present the financial soundness of the banks.  Every company uses different set of methods and techniques of accounting to compare the financials of  two companies which may not be feasible at all times (Pehlivan, 2013).

Profitability ratios helps to measure the profitability of a company and how far the company is used its resources to generate the profits. Profitability ratio represents the amount of the return on the overall company’s investment.  In addition to this, Profitability ratio is also helpful to present the profitability to the company’s stakeholders and investors, as they are more interested in generating returns (Bienias, Lehman & Gentene, 2013). Operating profit margin, return on capital employed, net profit margin and return on equity ratios are presented below: 

The Purpose of the Study

Particulars	Union Bank	NBQ	Union Bank	NBQ	Union Bank	NBQ	Union Bank4	NBQ
Profitability Ratios	2012	2012	2013	2013	2014	2014	2015	2015
Operating Profit Margin	86.52%	66.39%	96.21%	68.29%	97.55%	68.44%	94.97%	64.71%
Net Profit Margin	44.85%	62.04%	52.35%	77.58%	56.29%	52.53%	47.44%	95.69%
Return on Capital Employed	21.89%	10.28%	20.94%	8.75%	20.69%	10.74%	20.86%	9.19%
Return on Equity	11.35%	9.61%	11.39%	9.94%	11.94%	8.24%	10.42%	13.59%

Table presenting Profitability ratios

Operating profit Margin Ratio: Operating profit margin ratio measures the amount of profit earned by a firm against total revenue generated in a financial year (Zack, 2012).

It has been observed from the above graph that Union National Bank is more efficient than NBQ in managing its operating expenses. In the year 2012, the parting profit of Union Bank has been recorded at 86.52%, 96.21% in 2013, 97.55% in 2014 and 94.97% in the year 2015. Whereas operating profit ratio of NBQ has been stable over the last four financial year.  The average of last four-year operating profit was approximately 65%.

Net Profit Margin Ratio: NP ratio represents the net profit earned by a company in respect to its net sales. This ratio is very useful to analyse the actual profit earned by a company after deducting all the expenses (Needles & Marian, 2013).

It can be seen in the above graph that the net profit margin of both the banks were not stable over the last the last over financial years. Net profit margin of both the banks were highest in the last financial year 2015. 47.44% of union bank and 95.69% of NBQ has been the net profit margin for the year 2015.

Return on Capital Employed (ROCE): ROCE ratio is an important ratio with the shareholder’s perspective. ROCE ratio measures the ability of a company to earn return on the employed capital.

Return on capital employed of Union National Bank has been near around 20%. It was recorded highest 21.89% in the financial year 2013. Similarly, the highest ROEC of NBQ has been recorded in the year 2014 by 10.74%.

Return on Equity Ratio: Return on Equity ratio is an ideal ratio which represents the efficiency of a company to deliver return on the shareholder’s equity. Return on equity shows the amount of profit generated against each share (Collier, 2012).

Return on Equity has been decreased over the last two financial years. Return on equity of Union National Bank was highest by 21.89% in the financial year 2013 which declined to 20.69% in the next financial year 2013 and recorded at 20.86% in the year 2015. On the other hand, Return on equity of NBQ has been significantly increased 13.59% in the financial year 2015. In the financial year 2014, it was recorded at 8.24% which is the minimum ROE over the last four-financial years.

The Scope of the Study

With the help of debt equity ratio, debt paying efficiency of the entity is measured. The debt-equity ratio helps in comparing the total debt against total equity of the company.

Particulars	Union Bank	NBQ	Union Bank	NBQ	Union Bank	NBQ	Union Bank4	NBQ
	2012	2012	2013	2013	2014	2014	2015	2015
Debt-Equity Ratio	5.17	2.58	4.71	2.39	4.52	2.49	4.69	2.35

Table showing Debt-Equity ratio of Union National Bank and NBQ

Debt Equity ratio of Union National Bank has been decreased over the last four-financial years. In the year 2012 it has been recorded at 5.17% which significantly decreased to 4.17% in 2013. In the year 2014 it further decreased to 4.52% which slightly increased in the next financial year 2015 to 4.59%. Similar movement has been observed in NBQ Bank.

Earnings per share represents the earnings of a company against its each share. This ratio shows how much a company earned against its total equity share capital (Kumbirai & Webb, 2010).

Earnings per share of Union National Bank has significantly increased over the last four financial years. AED 0.56 was the earnings per share in the year 2012 which exponentially increased to AED 0.62 in the year 2013. In the year 2015, it was recorded at AED 0.65. In contrary, the earnings per share of NBQ was not stable in last four financial years. In 2013 it was AED 0.23 which decreased to AED 0.17 in the next financial year. However, in the year 2015, it significantly increased to AED 0.29. Increasing price earnings is favourable as it represents the good market performance of the company (Peterson, Fabozzi, & John, 2012).   

The international credit rating agency, Capital Intelligence (CI), has raised the financial strength rating of Union National Bank (UNB) to A+, from A. This rating shows the increasing popularity and market demand of Union National Bank in UAE. Bank’s improving financials the sources which support the A+ rating given by CI is not unfair.

The balance sheet of UNB’s has expanded at a robust pace also the asset quality ratios have strengthened over the last four years.

UNB’s business franchise has been significantly growing. Acquisition of a small-sized bank in Egypt last year provided UNB with an opportunity to expand its geographic presence beyond UAE as well. However, CI believes that conservative outlook of UNB will be helpful in guiding its foreign expansion strategy. UNB is a well entrenched investment and corporate banking businesses within the UAE.

Revenue graph of NBQ has also significantly grown over the last four financial years. Net profit of the Bank has significantly grown and recorded at 95% in the financial years 2015. As the bank is in its expansion stage, it has less to pay to its shareholders.

Sources of Data

Conclusions and Recommendations

This business research study is an attempt to analyse and examine the performance of the conventional bank in UAE. For this purpose, financial comparison of NBQ and Union National Bank has been conducted. Ratio analysis has been considered for the financial assessments of both the banks. Ratio analysis is an ideal method to examine the financial performance of a company. It represents the complete financial reports in a simple and easy format. Different type of ratios is calculated to assess financial soundness of both the Banks. In terms of profitability both the banks are capable enough to generate profits. NBQ has recorded an exceptional profit of 95% in the financial year 2015. Net profit margin of NBQ has been higher than Union National Bank, however, in terms of popularity and market demand Union National Bank is more efficient than NBQ. The geographical reach of UNB is also more than NBQ. The debt-equity ratio of UNB is higher than NBQ which indicates the good solvency position of UNB. Return on Equity ratio of both the Banks has been significantly increased in the financial year 2015. Earings per share of Union Bank has been more than AED 0.50 per share over the last four financial years which is greater than the NBQ.

NBQ is required to expand its geographical reach in order to gain long-term sustainable growth. Also, it needs to focus on its products and services which are not as much innovative than UNB. NBQ operates through sixteen outlets whereas, UNB operates through more than 56 branches throughout the UAE. In the light of overall discussion, it can be concluded that conventional banks in UAE dominates the banking sector and gives very close completion to foreign banks. In order to maintain this competency and market leadership, conventional banks are required to come up with new and innovative products and services which will help them to build long-term sustainable growth. UAE banking sector has also grown drastically after the globalization and is gearing up for global competition.

References

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Masood, O & Ashraf, M.  (2012). Bank-specific and macroeconomic profitability determinants of Islamic  banks.  Qualitative  Research  in  Financial Markets, 4 (3) pp. 255 – 268.

Needles, B. E., & Marian. (2013). Principles of Financial Accounting Powers. Mason: Cengage Learning.

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