Banking Industry Benchmarking
             for
  National Bank of Fujairah




                Group no 9
        Navin Ba...
Forward Together




                                   Acknowledgements

We take this opportunity to thank National Bank ...
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                                       Declaration
This is to certify that the project titled “Bankin...
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                                         Disclaimer
This document is prepared as a part of the resear...
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                                 Executive Summary

National Bank of Fujairah (NBF) was incorporated ...
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A Data Envelopment Analysis (DEA) has been conducted to measure the relative
efficiencies of twelve bank...
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                                                   Table of Contents


1.      Introduction ............
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     2.4 Data Envelopment Analysis: .......................................................................
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                     List of Tables/Exhibits


Table No                Table/Exhibit Name            ...
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24   Liquid Asset Ratio Table                              42

25   Liquidity Ratio Table               ...
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53   Ranking of Banks based on Ratio Case Study Parameters      70

54   Hypothetical Best Bank         ...
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     1. Introduction

     “If you know your enemy and know yourself, you need not fear the
          ...
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1.1.2 Benchmarking Process




1.1.3 Against whom or what should the comparison be made?

An organizatio...
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1.2.2 Overview – Key Developments

The growth in the economy has funded government spending which has fi...
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growth. The increasing population as well as the demographic mix is creating additional
business opportu...
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UAE has the highest banking penetration in the GCC in terms of assets, loans and deposits.
This is refle...
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                                           Banking Penetration - GCC




Source: Respective Central Bank...
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                  Assets               Assets                Assets            % growth           % grow...
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Source: UAE Central Bank; Respective annual reports; All figures in AED bn


In terms of credit conce...
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                                                   Deposit Growth




     900.00                       ...
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1.2.5 Islamic Banking – Future of UAE banking

As of now, there are six Islamic banks in UAE, namely ...
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1.4 Research Problem
The research problem is to benchmark National Bank of Fujairah against its peers...
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   2. Literature Review

2.1 Case Study Analysis - “The new leader’s guide to diagnosing the business”...
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2.1.1 Cost and Prices almost always decline
Inflation adjusted cost and prices have been observed to dec...
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Keeping a track of customer loyalty and retention is equally important. Usually getting a new
customer i...
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                       Merits and Limitations of Ratio Analysis




2.3 DuPont Analysis

Many banks use ...
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Curtin University of Technology, Perth conducted a research in the year 2006 to measure
the financial pe...
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Instead of using fixed weights, DEA works out a separate set of weights for each decision-
making unit...
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2.4.4 Other relevant literature


Outcome of various DEA studies to measure bank’s performances have bee...
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        3. Research Design

     NBF’s
comparison with         HBR case study            Hypothetical
 ...
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Schedule of Questions
   •   Products (costs and price)
What are the bank’s product offerings? – broa...
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warning sign for any organization in the long term. If the cost is coming down at a higher rate
then the...
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•   Cost of Funding: In simple words, cost of funding indicates how much a bank is
    paying for its...
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   •   Human Cost Ratio: In today’s business environment, people form the most
       important assets o...
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   •   Return on Assets (ROA): ROA shows how profits are generated by utilizing the
       assets. ROA i...
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   •   Investment Income Ratio: The ratio of non-core income (investment income) to
       total inco...
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•   Book Value: Book value is the ratio of net assets to shareholders capital. Net assets
    are calcul...
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3.2.2 Data Envelopment Analysis (DEA)

DEA has been conducted to measure the relative efficiencies of...
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Analysis has been done for an input-oriented and output-oriented model. In the input-
oriented model, ca...
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                               4. Analysis and Inference

4.1 Ratio Analysis

4.1.1 Cost and Prices

I...
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41
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4.1.1.1 Liquid asset ratio

Liquid asset ratio is used to compute the percentage of liquid assets in ...
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4.1.1.2 Liquidity ratio

Liquidity ratio is used to analyze the liquid assets of the banks to meet th...
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  4.1.1.3 Non-Operating Asset ratio

  Non-operating assets ratio is used to infer the total percenta...
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4.1.1.4 Cost of Funds (%)

The Cost of funds is the prima facie or the most vital figure for any bank...
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4.1.1.5 NIM Spread (%)

NIM spread or net interest margin spread is the most crucial parameter to ana...
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      4.1.1.6 Loan Book

      Loan book is not used as a measure of ratio analysis. It is used as a ...
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4.1.1.7 Non-Operating Income (%)

The average industry non-operating income stood at 16% in 2007. NBF...
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4.1.1.8 Non-operating expense (%)

Non-operating expense ratio is used to compute the cost allocation...
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4.1.2 Competitive Position

In competitive position, the focus is on performance as compared to the i...
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51
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4.1.2.1 ROE

NBF’s ROE was in line with the average industry rate of 19% (NBF’s ROE was 20% - 2007).
...
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4.1.2.2 Profit Margin

The industry’s profit margin was 64% in 2007 (whereas NBF’s profit margin stood a...
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4.1.2.3 Core Interest ratio

The average industry (interest income to total income) ratio is 55% in 2007...
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4.1.2.4 Return on Assets

The overall return on assets of 3% (for the industry) is very low over the ...
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  1. 1. Banking Industry Benchmarking for National Bank of Fujairah Group no 9 Navin Bafna – GMBA08A125 Pratik Mehta – GMBA08B129 Punit Biyani – GMBA08B131 Yashesh Thakkar – GMBA08A147 June 2008
  2. 2. Forward Together Acknowledgements We take this opportunity to thank National Bank of Fujairah for providing us an insight in the UAE banking industry. Our mentors, Mr. Adnan Anwar and Mr. Ali Asif Sheikh have given their valuable time and industry related inputs in making this project successful. Secondly, we are grateful to SP Jain Center of Management for widening our knowledge horizons and practical skills in the industry. Lastly, the project would not have been possible without the support of Dr. Vijay Sethi, Dr. Shilpa Dalvi, Prof. Arindam Banerjee and Prof. Uday Bhate. We appreciate their efforts and enthusiastic spirit. 2
  3. 3. Forward Together Declaration This is to certify that the project titled “Banking Industry Benchmarking for National Bank of Fujairah” submitted in partial fulfillment of the requirement for the award of degree Global Masters in Business Administration comprises of the researchers’ original work and has not been taken from any other college, university, or educational institution. Date: 8th June 2008 Navin Bafna – GMBA08A125 Pratik Mehta – GMBA08B129 Punit Biyani – GMBA08B131 Yashesh Thakkar – GMBA08A147 3
  4. 4. Forward Together Disclaimer This document is prepared as a part of the researchers’ educational requirement and must not be taken as an indicator to the industry happenings. This report is sourced from publicly available information deemed accurate for the purpose of this study. While enough care has been taken on the groundwork of this research, researchers make no representation or warranty, expressed or implied as to the accuracy, timelines or completeness of any information in the report. The information provided in the report represents the views of the researchers and they will not be liable for any loss incurred by users of this report. Date: 8th June 2008 Navin Bafna – GMBA08A125 Pratik Mehta – GMBA08B129 Punit Biyani – GMBA08B131 Yashesh Thakkar – GMBA08A147 4
  5. 5. Forward Together Executive Summary National Bank of Fujairah (NBF) was incorporated in 1982. Fujairah government and Dubai government currently hold a 43.23% and 10.76% stake in NBF respectively. HE - Issa Saleh Al Gurg holds 21.39% personal stake in the bank. NBF offers corporate banking (with an expertise in trade finance), retail banking, wealth management, small and medium enterprise (SME) banking, treasury and financial institutional services. Its wholly owned subsidiaries are NBF Financial Services FZC and NBF Securities LLC. Last year NBF’s profits jumped to AED 323.8 million (growth of 36.3% as compared to 2006). NBF is listed on the Abu Dhabi stock exchange under the ticker quot;NBFquot;. NBF is considering expansion in retail and SME activities. In addition, it is planning to restructure its business operations. Therefore, NBF needs to be aware of its overall positioning in the banking sector. The study involves reviewing the industry trends, analyzing financial ratios, comparing industry-wide disclosures and benchmarking NBF with respect to its local peers. We have included seventeen local banks in the study (due to availability of data). A Hypothetical Best Bank has been created based on certain parameters provided by NBF. They include cost and prices, competitive position, customers and profit pool and simplicity (sourced from HBR case study titled ‘The new leader’s guide to diagnosing the business’). Based on the same parameters relevant ratios have been allocated and analyzed. Consequently, NBF has been benchmarked against the best bank. 5
  6. 6. Forward Together A Data Envelopment Analysis (DEA) has been conducted to measure the relative efficiencies of twelve banks (biggest banks based on asset size). Measuring the efficiencies of banks is difficult because banks have multiple output and input variables. The input variables are equity, deposits and borrowings whereas the output variables are loans and advances, investments and net profits. In order to validate the study and understand the industry dynamics, primary research was carried across seven different bankers. The main findings of the study are: • UAE is an over banked economy • National banks benefit due to name lending • In 2005 and 2006, overall profitability of the major banks saw a rise due to the volume of IPO activity • Islamic banking growth is a key focus for the national banks • Most of the banks are into the business of mortgage financing and real estate leasing through their subsidiaries. UAE has witnessed a real estate boom over the past three-four years • UAE banking sector will witness consolidation in the next three-five years • Bank of Sharjah and RAK bank have expanded their reach in the retail markets through credit cards and investment products • ENBD is outperforming the industry on asset size and loan book • Mashreq bank is outperforming the industry in wealth creation. Its book value per share has been the highest (over the last three years) Through this report, NBF will be able to map out a plan in terms of its expansion and product development. It will also be able to gauge the opportunities and get a sense of direction in the banking space. 6
  7. 7. Forward Together Table of Contents 1. Introduction .................................................................................................................. 12 1.1 Benchmarking:........................................................................................................... 12 1.1.1 Why Benchmarking? ........................................................................................... 12 1.1.2 Benchmarking Process........................................................................................ 13 1.1.3 Against whom or what should the comparison be made? .................................... 13 1.2 Background of the research ....................................................................................... 13 1.2.1 UAE Economy..................................................................................................... 13 1.2.2 Overview – Key Developments............................................................................ 14 1.2.3 Favorable demographic profile ............................................................................ 14 1.2.4 UAE Banking Sector............................................................................................ 14 1.2.5 Islamic Banking – Future of UAE banking............................................................ 21 1.2.6 Consolidation - Need of the hour ......................................................................... 21 1.3 Need for the study...................................................................................................... 21 1.4 Research Problem ..................................................................................................... 22 1.5 Research Objectives.................................................................................................. 22 1.6 Brief Methodology ...................................................................................................... 22 1.7 Limitations ................................................................................................................. 22 2. Literature Review ......................................................................................................... 23 2.1 Case Study Analysis - “The new leader’s guide to diagnosing the business” ............. 23 2.1.1 Cost and Prices almost always decline................................................................ 24 2.1.2 Competitive position determines options ............................................................. 24 2.1.3 Customers and profit pools don’t stand still ......................................................... 24 2.1.4 Simplicity gets results .......................................................................................... 25 2.2 Ratio Analysis ............................................................................................................ 25 2.3 DuPont Analysis ........................................................................................................ 26 7
  8. 8. Forward Together 2.4 Data Envelopment Analysis: ...................................................................................... 27 2.4.1 How DEA Works.................................................................................................. 27 2.4.2 Conceptually Working.......................................................................................... 27 2.4.3 Formula ............................................................................................................... 28 2.4.4 Other relevant literature....................................................................................... 28 2.4.4 Other relevant literature....................................................................................... 29 3. Research Design.......................................................................................................... 30 3.1 Methods of data collection and validation................................................................... 30 3.1.1 Secondary research ............................................................................................ 30 3.1.2 Primary research ................................................................................................. 30 3.2 Tools for data analysis ............................................................................................... 31 3.2.1 HBR Case Study - The new leader’s guide to diagnosing the business ............... 31 3.2.1.1 Cost and Prices almost always decline .........................................................31 3.2.1.2 Your Competitive position determines your Options...................................... 34 3.2.1.3 Customers and Profit pools don’t stand still................................................... 35 3.2.1.4 Simplicity gets Results .................................................................................. 36 3.2.2 Data Envelopment Analysis (DEA) ...................................................................... 38 3.3 Limitations ................................................................................................................. 39 3.3.1 Ratio Analysis...................................................................................................... 39 3.3.2 DEA..................................................................................................................... 39 3.3.3 Primary Research................................................................................................ 39 4. Analysis and Inference ................................................................................................. 40 4.1 Ratio Analysis ............................................................................................................ 40 4.2 Hypothetical Best Bank.............................................................................................. 71 4.3 Data Envelopment Analysis (DEA)............................................................................. 73 4.4 Primary Research – Validation of Secondary ............................................................. 87 4.5 Overall Inferences...................................................................................................... 89 4.6 Articles, Reports - Validation of Primary and Secondary Research ............................ 91 5. Conclusion and Recommendations .............................................................................. 95 8
  9. 9. Forward Together List of Tables/Exhibits Table No Table/Exhibit Name Page No 1 Benchmarking Process 13 2 UAE GDP (US$ billion) 13 3 UAE Population Chart 14 4 National vs. Foreign Banks (asset size) 15 5 Banking Penetration – UAE 16 6 SWOT Analysis of UAE Banking Sector 16 7 Banking Penetration – GCC 17 8 Banking Sector Assets 17 9 Ranking of Banks by Asset Size 18 10 Loan Book of Big Banks in UAE 19 11 Loan Mix (Corporate, Personal, Government) 19 12 Deposit Growth 20 13 Deposit Mix (Private, Government, Retail, Non Resident) 20 14 Parameters from the HBR case study titled ‘The new leader’s guide to diagnosing the business’ 23 15 Merits and Limitations of Ratio Analysis 26 16 DuPont Analysis Chart 26 17 DEA 27 18 Merits and Limitations of DEA 28 19 Research Design 30 20 Strategy for Primary Research 30 21 Total assets Graph for banks 40 22 Loans and Advances Graph 41 23 Net Interest Graph 41 9
  10. 10. Forward Together 24 Liquid Asset Ratio Table 42 25 Liquidity Ratio Table 43 26 Non-Operating Asset Ratio Table 44 27 Cost of Funds Table 45 28 NIM Spread Table 46 29 Loan Book Table 47 30 Non-Operating Income Table 48 31 Non-Operating Expense Table 49 32 Return on Equity Graph 50 33 Return on Assets Graph 51 34 Operating Profit Graph 51 35 Return on Equity Table 52 36 Profit Margin Table 53 37 Core Interest Ratio Table 54 38 Return on Assets Table 55 39 Equity Multiplier Table 56 40 Investments Graph 57 41 Loans and Advances Graph 58 42 Operating Expense Coverage to Net Core Income Table 59 43 Total Loans to Total Deposits Table 60 44 Total Loans to Ownership Funds Table 61 45 Investment Income Table 62 46 Return on Book Investments Table 63 47 Fee Income Table 64 48 EPS Graph 65 49 Book Value Table 66 50 EPS Table 67 51 Earnings to Ownership Funds Table 68 52 Investments to Ownership Funds Table 69 10
  11. 11. Forward Together 53 Ranking of Banks based on Ratio Case Study Parameters 70 54 Hypothetical Best Bank 71 55 DEA Charts 73-85 56 Efficiency and Profitability Matrix 86 11
  12. 12. Forward Together 1. Introduction “If you know your enemy and know yourself, you need not fear the result of a hundred battles” -Sun Tzu, Chinese General 1.1 Benchmarking: “Benchmarking is the practice of being humble enough to admit that a company is better at something, and being wise enough to learn how to match or even surpass it.” “Benchmarking is a continuous process of comparing an organization's products, services and processes against those of its close competitors or those of organizations renowned as world class or industry leaders and having one of the best practices.” Benchmarking is a vital component of the total quality management. If applied appropriately, it can help the organization in measuring its quality performance. The aim of benchmarking is to understand and evaluate the current position of a business or organization in relation to “best practices” and to identify key areas and means of performance improvement. In benchmarking, a company will compare itself to another organization in a structured manner. Other organizations may be recognized as world class in a specific function area. Benchmarking is the ability of an organization to learn from the operations of other organizations, improve its performance and add shareholder value. 1.1.1 Why Benchmarking? Benchmarking can be used as a highly effective weapon for improving performance. It can be used either as a tool in itself, or as an element of a Business Process Re-engineering project. • Benchmarking helps in determining realistic and achievable goals and objectives • It is useful in developing realistic action plans and strategies to achieve the goals • It strives to achieve excellence and innovation which is highly essential is today’s competitive world • It gives a better understanding of the organizations current position in the market • It underpins the drive for performance enhancement 12
  13. 13. Forward Together 1.1.2 Benchmarking Process 1.1.3 Against whom or what should the comparison be made? An organization should be benchmarked against prime candidates such as Business-to- business (B2B) companies and direct competitors. However, they are not the only targets. Benchmarking must be conducted against the best companies and business functions regardless of where they exist. 1.2 Background of the research 1.2.1 UAE Economy UAE is the second largest economy in the GCC after Saudi Arabia. Economist Intelligence Unit estimates the 2007 GDP at $187 bn. Driven by an increase in oil prices, real GDP growth has been rising steadily. Source: Economist Intelligence Unit (actual figures in 2005, 2006; estimates from 2007) GDP figures are at current market prices 13
  14. 14. Forward Together 1.2.2 Overview – Key Developments The growth in the economy has funded government spending which has filtered through to the economy through large capital projects. The government’s diversification plan includes investment in the hydrocarbons sector and major infrastructure and development projects across UAE. A substantial portion of the projects is being carried out in the Emirate of Abu Dhabi. It is expected that Abu Dhabi will come up with $227 bn worth of investments in infrastructure, tourism, manufacturing and oil sectors over the next ten years. UAE has emerged as a favorite investment destination for investors in neighboring countries such as Saudi Arabia, Qatar and Kuwait. UAE has also attracted foreign workers, ranging from laborers to business executives. However, this economic expansion has created challenges. Inflation has climbed sharply mainly due to soaring food and real estate prices. Weakness of the US Dollar is also adding to the inflationary pressures. 1.2.3 Favorable demographic profile UAE has witnessed population growth due to attractive employment opportunities, no tax policy and closeness to low cost labor markets such as India and China. The expatriate population has been the driver of population growth (UAE nationals account for only 20.1% of the population). UAE Population Chart Population (mn) 6.5 6.2 5.9 6.0 6 5.7 5.5 5.5 5.2 4.9 5 4.6 4.5 2005 2006 2007 2008 2009 2010 2011 2012 Source: Economist Intelligence Unit estimates (as actual data is only available till 2005 census) 1.2.4 UAE Banking Sector The rising oil wealth in UAE is speeding up infrastructure investment. Significant amounts of infrastructure and development projects are being finalized, providing an advantage to loan 14
  15. 15. Forward Together growth. The increasing population as well as the demographic mix is creating additional business opportunities for the banking sector. Due to low interest rates, sky-rocketing oil prices and a booming economy, banking sector assets have witnessed enormous growth. UAE is the largest banking sector in the GCC (as per total asset size). UAE’s assets were $335.6 bn in 2007 as compared to Saudi Arabia’s assets of $286.9 bn. The banking sector is very fragmented, serving a population of approximately 4 mn. Currently, there are 51 licensed banks in the UAE: • 23 national banks • 28 foreign banks National banks are in charge As of Dec 2007, national banks accounted for 78% of the total assets whereas foreign banks accounted for the remainder. Banks in Abu Dhabi and Dubai hold more than 90% of the total domestic assets (domestic assets are divided almost equally between Abu Dhabi and Dubai based banks). National banks are at the forefront as they have access to surplus government funds. In addition, they do not face any restrictions on number of branches. Foreign banks, on the other hand, have restrictions on number of branches. These factors have enabled national banks to stay ahead of foreign banks (in terms of market share). Source: UAE Central Bank; Research report titled ‘Exciting Times Ahead’ by The National Investor, 14th April 2008 World Trade Organization has put pressure on UAE to open up the banking sector to foreign players. As of now, national banks are expanding their operations locally and in GCC to counter the increased competition. 15
  16. 16. Forward Together UAE has the highest banking penetration in the GCC in terms of assets, loans and deposits. This is reflective of the relatively mature nature of banking infrastructure. Source: UAE Central Bank; Research report titled ‘Exciting Times Ahead’ by The National Investor dated 14th April 2008 Assets to GDP ratio of UAE rose from 133.30% in 2005 to 180.20% in 2007. Deposit to GDP ratio rose from 85.90% in 2005 to 105.60% in 2007 and credit penetration i.e. loans to GDP ratio rose from 82.50% in 2005 to 105.30% in 2007. During the last two years, banks in UAE have raised money from overseas markets. The credit crises due to the US sub-prime issue has resulted in risk aversion and increased funding costs. SWOT Analysis of UAE Banking Sector Strengths • Banking sector growth is fueled by UAE’s economic growth • Banks benefit from favorable demographics • Majority government ownership provides an advantage to national banks • Healthy competition • Strong profitability and high credit ratings Weaknesses • Fragmented sector • No credit history of expatriate population • High exposure to real estate loans and/or mortgages. Thus, if a softening takes place in the real estate sector, it will ripple through the system • Banks have resorted to higher cost sources of funding like EMTNs, syndicated loans, and sukuks; which have raised their funding costs on one side and created a better asset liability management on another Opportunities • Tremendous potential in segments such as retail, mortgage, SME, Islamic lending • The corporate sector is yet to benefit from infrastructure, housing, tourism and manufacturing projects, along with the growth in other sectors Risks and Challenges • Lack of experienced banking executives • Credit concentration in certain sectors • Competition will intensify, leading to pressure on spreads, margins and market shares • Rising cost of funding Source: Research report titled “UAE banking sector review” by Beltone dated 17th December 2007 16
  17. 17. Forward Together Banking Penetration - GCC Source: Respective Central Banks; Research report titled ‘Exciting Times Ahead’ by The National Investor dated 14th April 2008; GCC* excluding Bahrain due to non-comparable data UAE has the highest penetration in GCC in terms of banking assets to GDP (180.20%), loans to GDP (105.30%) and deposits to GDP (105.60%). Kuwait and Qatar are the second and third most penetrated economies in GCC. Banking Sector Assets 1500.00 44.00% 1232.72 1200.00 42.00% 866.00 900.00 624.98 40.00% 600.00 38.00% 300.00 0.00 36.00% 2005 2006 2007 Assets (D billion) h Grow (%) th Source: UAE Central Bank; All figures in AED bn (apart from percentages) The total banking assets in UAE have increased from AED 624.98 bn in 2005 to AED 1232.72 bn in 2007, making it the largest among the GCC countries. The banking assets have grown at a CAGR of 25.13% during 2005-2007. 17
  18. 18. Forward Together Assets Assets Assets % growth % growth (2005) (2006) (2007) 06-07 05-06 CAGR Others 139.36 265.10 279.85 90.23% 5.56% 25.87% ENBD 110.80 95.88 253.81 -13.47% 164.72% 31.46% NBAD 84.96 100.97 139.43 18.84% 38.10% 17.76% ADCB 57.73 81.09 106.21 40.47% 30.99% 22.29% MB 46.54 56.75 87.63 21.92% 54.42% 23.22% DIB 43.00 64.43 83.74 49.85% 29.96% 24.60% FGB 26.28 47.76 73.20 81.71% 53.26% 40.21% UNB 34.93 41.57 55.46 19.01% 33.40% 16.48% ADIB 22.19 36.29 44.04 63.55% 21.36% 25.39% CBD 15.28 18.70 30.44 22.38% 62.72% 25.52% NBF 6.28 8.63 12.29 37.37% 42.49% 24.81% CBI 5.23 7.38 11.12 41.06% 50.65% 28.24% RAK 7.30 8.84 10.97 21.19% 24.11% 14.42% SIB 5.30 7.64 10.88 44.24% 42.43% 26.82% BOS 5.75 8.35 10.79 45.30% 29.16% 23.09% NBUAQ 3.77 5.17 8.43 37.02% 63.09% 30.39% IB 6.15 6.66 8.25 8.39% 23.77% 10.18% UAB 4.13 4.79 6.18 15.90% 29.12% 14.23% All 722.10 515.38 379.09 40.11% 35.95% 23.69% Banks Source: UAE Central Bank; Respective annual reports; Banks sorted on the basis of asset size in 2007 All figures in AED bn (apart from percentages) Emirates Bank International Limited (EBIL) and National Bank of Dubai (NBD) merged in October 2007. ENBD (the merged entity) had a total asset size of AED 253.8 bn at the end of 2007. This represents 20% of the total assets of the sector. ENBD is the largest bank in MENA in terms of asset size (surpassing the Saudi-based National Commercial Bank). NBF has grown at the industry rate during these years. It recorded assets of AED 12.29 bn at the end of 2007. Industry loans grew at a CAGR of 23.69%, from AED 379.09 bn in 2005 to AED 722.10 bn in 2007 (UAE Central Bank). During the last couple of years, UAE banks have mobilized wholesale funding in the overseas markets. The medium and long-term borrowings have helped banks to increase the duration of liabilities and fund long-term projects. Resource mobilization holds the key to strong loan growth. The US sub-prime is likely to affect the lending programmes of the UAE banks as the funding costs continue to remain high. ENBD’s loan book has grown from AED 59.28 bn in 2006 to AED 152 bn in 2007. NBAD has also made significant additions to its loan book. 18
  19. 19. Forward Together Source: UAE Central Bank; Respective annual reports; All figures in AED bn In terms of credit concentration, the corporate sector continues to seek its funding requirement to support business growth. Corporate sector contributed to 65% of the overall system lending in 2007. Consumer loans as a percentage of total credit were 25.3% in 2007. The share of loans to Government decreased from 11.1% in 2005 to 9.7% in 2007. Loan Mix 120.00% 100.00% 11.10% 10.10% 9.70% 80.00% 27.70% 25.10% 25.30% 60.00% 40.00% 61.20% 64.80% 65.00% 20.00% 0.00% 2005 2006 2007 Corporate Personal Government Source: UAE Central Bank, Research report titled ‘Exciting Times Ahead’ by The National Investor dated 14th April 2008; 2007 data as of Sept 2007 19
  20. 20. Forward Together Deposit Growth 900.00 40.00% 720.06 750.00 32.00% 558.26 600.00 426.54 24.00% 450.00 16.00% 300.00 150.00 8.00% 0.00 0.00% 2005 2006 2007 Deposits Growth (%) Source: UAE Central Bank; All figures in AED bn (apart from percentages) Customer deposits increased from AED 426.54 bn in 2005 to AED 720.06 bn in 2007. Deposits grew at a CAGR of 18.86% as compared to 25.13% in case of assets. During the last three years, sovereign and private sector deposits have decreased (as a % of total deposits). Private sector contribution to the overall deposits has increased from 39.10% in 2005 to 40.30% in 2007. Deposit Mix 120.00% 100.00% 6.20% 9.50% 10.40% 80.00% 28.60% 27.40% 27.20% 60.00% 26.10% 25.40% 22.10% 40.00% 20.00% 39.10% 37.60% 40.30% 0.00% 2005 2006 2007 Priv sector ate G ernment and public sector ov Retail Non-resident Source: UAE Central Bank, Research report titled ‘Exciting Times Ahead’ by The National Investor dated 14th April 2008; 2007 data as of Sept 2007 20
  21. 21. Forward Together 1.2.5 Islamic Banking – Future of UAE banking As of now, there are six Islamic banks in UAE, namely Abu Dhabi Islamic Bank, Dubai Bank, Dubai Islamic Bank, Sharjah Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank. The growing desire of customers to transact in accordance with Shariah Islamic principles has compelled conventional banks to start providing Islamic banking facilities (either through an Islamic subsidiary or through their existing infrastructure). The Central Bank of UAE recently granted three Islamic banking licenses to Ajman Bank, Crescent Bank and Al Hilal bank. Islamic lending market was AED 94 bn in 2006, accounting for 18% of gross loans. Islamic assets as a percentage of total assets stood at 14% in 2006. 1.2.6 Consolidation - Need of the hour The merger between Emirates Bank International and National Bank of Dubai is a significant development in the banking sector. The merged entity (ENBD) has become the largest bank in the region by asset size. The size of ENBD will play a crucial role in the sector, especially when it comes to big projects in infrastructure, housing, travel/tourism and banking. In this scenario, the role of banks in terms of financial intermediation is very important. Recently, there have been rumors about a merger between ADCB and NBAD. Consolidation is likely to happen, which is healthy for the fragmented banking sector. This would allow banks to expand their networks, grow their customers, and improve efficiencies. Consolidation has picked up pace due to robust economic growth and repositioning strategies of banks to counter competition. 1.3 Need for the study Need for the study from NBF’s perspective is as follows: • NBF needs to utilize resources optimally and maximize profits • It also needs to devise a strategy to explore potential markets and increase its revenues and market shares • The study will provide NBF with a clear picture regarding positioning for future growth 21
  22. 22. Forward Together 1.4 Research Problem The research problem is to benchmark National Bank of Fujairah against its peers (in the UAE region). Peers ould also include Hypothetical Best Bank analysis (ratio analysis) and Data Envelopment Analysis (DEA) with a focus on underlying factors, business factors such as positioning with respect to business life cycle, product diversity and economies of scale. 1.5 Research Objectives • Review the banking industry’s performance over the last three years • Conduct competitive benchmarking analysis for NBF with respect to its peers • Provide NBF with a sense of direction in terms of expansion and product development 1.6 Brief Methodology Hypothetical Best Bank has been created based on certain parameters provided by NBF. They include cost and prices, competitive position, customers and profit pool and simplicity (sourced from HBR case study titled ‘The new leader’s guide to diagnosing the business’). Based on the same parameters, relevant ratios have been allocated and analyzed. Consequently, NBF has been benchmarked against the best bank. Data Envelopment Analysis (DEA) has been conducted to measure the relative efficiencies of twelve banks (biggest banks based on asset size). Measuring the efficiencies of banks is difficult because banks have multiple output and input variables. The input variables are equity, deposits and borrowings whereas the output variables are loans and advances, investments and net profits. In order to validate the study and understand the industry dynamics, primary research has been carried across seven different bankers. 1.7 Limitations • Researchers have considered seventeen national banks out of a total twenty-three national banks due to the unavailability of 2007 financials (for the excluded banks) • Moreover, foreign banks have not been included in the study • The detailed limitations for each methodology have been included in the literature review and research methodology section 22
  23. 23. Forward Together 2. Literature Review 2.1 Case Study Analysis - “The new leader’s guide to diagnosing the business” Every organization wants to increase its profitability, efficiency, productivity, market share and revenue. Every manager is keen to have a strong financial performance during his tenure. There are different methods to enhance the performance and achieve the desired goal. Hire the best employees from top B-Schools, pay these employees in million dollars and do things differently. Still the company fails to achieve its goal. Only a few companies are able to achieve the pre-determined target. Why? It is a question running in the minds of millions of CEO’s around the globe. The solution is as transparent as the water. Every organization in the world is unique. No two organizations can be same. What needs to be done is to identify an organization’s strengths and weakness. This will be distinct from all other organizations operating in the world. However, just an internal evaluation of weakness and strength will not be enough to change things. A comparison then needs to be made with the best process, standard and quality prevailing in the industry. A strategy is initiated and implemented to reach that significant level. This will help in enhancing organizations’ performance in the industry. However, this has to be done in a structured manner so that all critical bases of the points have been covered and all unimportant points avoided. The diagnosis can be classified in four parameters. Key Factors 23
  24. 24. Forward Together 2.1.1 Cost and Prices almost always decline Inflation adjusted cost and prices have been observed to decline i.e. they have a downward trend. The logic is simple- by increasing production or services, cost per unit comes down and as competition increases in the market, prices most of the times gradually decline. This is relevant in every industry and it is important for every organization to understand this concept. If the prices have been coming down at a certain rate and the cost is also falling but at a lesser rate, then the company needs to check its cost. Falling prices and rising cost is a warning sign for any organization in the long term. If the cost is coming down at a higher rate then the fall in prices, then it a positive sign for the organization. The company also needs to understand its overall cost trends. It needs to segment its cost structure and the important components need to be managed efficiently. An organization also needs to analyze its costs compared to its competitors. This will give it a fair idea about its cost components and areas of improvements. A hypothetical competitor can be created which represents the best of the best cost and performance and it can be used a as benchmark for improvement. Assign direct and indirect costs to all product and services. This will reveal the cost and revenue drivers and in which area is the performance below the benchmark. This will help in eliminating less profitable products and services and enhance overall profitability. 2.1.2 Competitive position determines options How good the competitor is doing can also determine how good the organization is performing. Analyzing competitors’ Return on Assets (ROA) or Relative Market Share (RMS) will reveal where the organizations stands in the industry. This will indicate the market leaders who have been outperforming the benchmark and then the reason for their superiority. Is it because of customer loyalty, lower costs or distribution strategy? The reasons can differ from industry to industry. A similar analysis can be done for an organization performing below the benchmark. Analyzing the market growth rate is helpful in evaluating opportunities and potential in the market. 2.1.3 Customers and profit pools don’t stand still Markets have been dynamic and fragile. What is true today may not hold true tomorrow. Customer’s behavior, demands, perceptions and choices change regularly. Organizations need to change the tactics and strategy according to the changes in market. Be proactive or else be out of the market. An in-depth study of customer’s behavior and needs by segment is a necessity. This will help in planning future strategies. 24
  25. 25. Forward Together Keeping a track of customer loyalty and retention is equally important. Usually getting a new customer is much more expensive then retaining a customer. Different tools can be used to get an indicator of loyalty and probable retention. Based on the above analysis further strategies can be made. The trends and changes in the industry profit pool are vital. 2.1.4 Simplicity gets results First, analyze the degree of complexity to obtain the product and services to the customer and the relative costs to the organization. Higher degree of complexity increases the cost and reduces the customers. Also, study the impact of complexity on customer’s minds and decision-making. In general, organizations who have simplified activities and process have lower costs. Then identify innovation fulcrum – the point at which variety of products and services offer maximize sales and profits. Complex decision-making can affect the performance of an organization. Using various tools, analyze the complexity of decision-making compared to the competitors and identify the possible impact of complex decision-making in an organization. The possible impact could be the communication and feedback with distributors, suppliers and retailers. How quickly a decision can help in grabbing opportunities? A delay in decision-making could load to a lost opportunity. The competitor may be at an advantage because of simplicity in decision-making at different levels. Strategies can be devised to attack this advantage. 2.2 Ratio Analysis Ratio analysis involves calculation and comparison of ratios which are derived from financial statements of a company. It is helpful in determining the financial health of a company. Fisher College of Business, Ohio State University has conducted a research and used ratio analysis for determining the performance of banks in 2006. It has used the ratios under the following four parameters: • Profitability Ratios • Liquidity Ratios • Asset Quality Ratios • Valuation Ratios Ratios have been allocated to the above four parameters and then a comprehensive peer group analysis has been conducted to measure the performance of banks. 25
  26. 26. Forward Together Merits and Limitations of Ratio Analysis 2.3 DuPont Analysis Many banks use DuPont for measuring the overall performance. In DuPont, Return on Equity (ROE) is the most important ratio that determines how well the bank is performing. ROE is drilled down to different ratios to arrive at certain parameters, which drive the performance of a bank. Below is a generalized DuPont chart used by banks and companies. DuPont Analysis 26
  27. 27. Forward Together Curtin University of Technology, Perth conducted a research in the year 2006 to measure the financial performance of 12 local South African banks. The university used DuPont, Ratio Analysis and DEA analysis. The ratios used for the study are net non-interest margin, net bank operating margin, asset utilization, equity multiplier and earnings per share. It was concluded that the profitability was based on the efficiency utilization of capital. Interest and non-interest income were two other components that largely affected the profitability of banks. Few banks were performing well as they had higher NIM, while others were performing well as they had lower non-interest expenses. 2.4 Data Envelopment Analysis: DEA has grown to be an accepted management tool. It is an application of linear programming. It is used to measure relative efficiency of a number of decision-making units. The core of the analysis lies in finding the “BEST” decision making unit. “The model was originally developed by Charnes, Cooper and Rhodes in 1978 and was extended by Banker, Charnes and Cooper in 1984 to include variable returns to scale.” 2.4.1 How DEA Works 2.4.2 Conceptually Working Decision Making Unit Share Capital, Total Loans and Advances, Borrowings, Total Deposits Investments, Net Profit 27
  28. 28. Forward Together Instead of using fixed weights, DEA works out a separate set of weights for each decision- making unit. The weights are optimized to make that decision-making unit the best. 2.4.3 Formula K is number of units (decision making units) k = 1,2,3,……K N is number of inputs i = 1,2,3,......N M is number of outputs j = 1,2,3,……M Ojk is observed level of output j from decision making unit k Iik is observed level of input I from decision making unit k vi is weight on input i uj is weight on output j Ek is efficiency of decision making unit (0-1) Source: http://www.etm.pdx.edu/dea/homedea.html Merits and Limitations of DEA 28
  29. 29. Forward Together 2.4.4 Other relevant literature Outcome of various DEA studies to measure bank’s performances have been varied. The studies that have been referred to are: • “Behind DEA Efficiency in Financial Institutions by C. Serrano Cinca, C. Mar Molinero and F. Chaparro García in 2002” • “Efficiency in the Italian Banking Industry: Data Envelopment Analysis by Dimitrios Angelidis in 2006” • “Risk and Efficiency in East Asian Banks by Luc Laeven in 1996” • “Benchmarking the Performance of US Banks by R. Barr, T. Siems and S. Zimmel, in 1998” • “Does efficiency matter when profits are high–The case of UAE Banks by Brue Q Budd in 2004” Most studies have a common view that banks are generally inefficient and at times smaller banks perform much better than larger banks. This is due the scaling problem. In addition, very little research has been done on UAE banks due to lack of appropriate research data. Research by Brue Q Budd in 2004 discusses 21 local banks of UAE that have regulated advantages. The research measures the efficiencies of banks in a period of high profitability and the results indicate that there are cost inefficiencies in the over banked sector. Research by Luc Laveven and research by C. Serrano Cinca, C. Mar Molinero and F. Chaparro García in 2002 indicate that size is not an important factor for banks to perform efficiently. Research by Dimitrios Angelidis in 2006 examines the productivity of 100 larger Italians banks for a given period (2001-2002) and proves a point that there is an inverse relationship between size and productivity growth. Research by R. Barr, T. Siems and S. Zimmel in 1998 assesses and analyzes the relative efficiencies of the commercial banks and the risks associated with these banks. All research indicates that inputs are constrains and they must be minimized as far as possible and the bank should drive growth through sales with proper risk management measurers. 29
  30. 30. Forward Together 3. Research Design NBF’s comparison with HBR case study Hypothetical other banks (based on four Best Bank parameters) (Ratio analysis) Validation through Conclusion and Primary recommendation research Methods of data Peer-to-Peer collection - analysis (DEA) Secondary 3.1 Methods of data collection and validation 3.1.1 Secondary research The financial statements (balance sheets and income statements) have been used for secondary research. These statements help in determining the financial health of banks. In addition, research has been carried out on the products, pricing and costing of banks. Researchers have also referred to industry research reports for understanding the sector trends and forecasts. 3.1.2 Primary research Personal interviews have been carried out across seven different bankers. This research has helped in validating the analysis and inference. The schedule of questions were based on income generating products, client profiles related to these products, competitive positioning, industry growth drivers and future prospects. These interviews were unstructured and discussion based. 30
  31. 31. Forward Together Schedule of Questions • Products (costs and price) What are the bank’s product offerings? – broad base How are these products different from those of the competitors? – cost inclusive What are the charges related to this ‘product’? – specific product Where could the bank improve most, with respect to its competitors? Which are the segments of the market that the bank wanted to enter? • Client Profile Who are the bank’s key clients in terms of revenues/frequency of transactions/product based? Which are the biggest, fastest growing and most profitable customer segments? What are the bank’s opportunities and threats? Which client segment is likely to witness the maximum growth in near future? • Competitive Positioning What is the expected growth rate of the bank in near future as compared to the industry? How big is the market? • Future Prospects Which direction is the industry heading in? Which direction is the bank heading in? What are the new innovative products coming into the market? 3.2 Tools for data analysis 3.2.1 HBR Case Study - The new leader’s guide to diagnosing the business 3.2.1.1 Cost and Prices almost always decline Inflation adjusted cost and prices have been observed to decline i.e. they have a downward trend. The logic is simple- by increasing production or services, cost per unit comes down and as competition increases in the market, prices most of the times gradually decline. This is relevant in every industry and it is important for every organization to understand this concept. If the prices have been coming down at a certain rate and the cost is also falling but at a lesser rate, then the company needs to check its cost. Falling prices and rising cost is a 31
  32. 32. Forward Together warning sign for any organization in the long term. If the cost is coming down at a higher rate then the fall in prices, then it a positive sign for the organization. The company also needs to understand its overall cost trends. It needs to segment its cost structure and the important components need to be managed efficiently. An organization also needs to analyze its costs compared to its competitors. This will give it a fair idea about its cost components and areas of improvements. A hypothetical competitor can be created which represents the best of the best cost and performance and it can be used a as benchmark for improvement. Assign direct and indirect costs to all product and services. This will reveal the cost and revenue drivers and in which area is the performance below the benchmark. This will help in eliminating less profitable products and services and enhance overall profitability. The ratios under this parameter- • Liquidity Ratio: Liquidity ratio is useful in determining the banks ability to meet its short-term requirements. Customers (depositors) can demand money at any given day and banks have to meet the obligations. Liquidity ratio has an impact on cost and prices and hence becomes even more important for banks. Excess liquidity means that the bank is investing in low yielding assets such as treasury bills or interbank lending. This will affect the costs and pricing structure of the bank • Liquid Assets Ratio: The ratio of liquid assets (current assets) to total assets is liquid assets ratio. Investment in liquid assets generally have low yield. High liquid asset ratio implies lower investments in other high yielding assets. This will lead to a change in cost and pricing structure for banks. It is an opportunity cost for the banks • Non-Operating Assets Ratio: Non-operating assets are assets that are not directly invested in the business operations. Non-operating assets are investments made outside the core business of the company to mitigate risk and increase returns 32
  33. 33. Forward Together • Cost of Funding: In simple words, cost of funding indicates how much a bank is paying for its deposits and borrowings. Cost of funding is the most important cost element of a bank. It is one of the important ratios used to measure a bank’s efficiency. Prices set by the banks will depend on its cost of funding • Net Interest Margin (NIM) spread: This ratio is used by most of the banks globally for analyzing operational efficiency. NIM is the difference between how much a bank earns from its investments, loans, and advances and how much it pays to its customers and lenders. It is a crucial ratio for measuring the performance of a bank ) • Loan Book: Loan book is not a ratio. It is a benchmark figure to view the core business of a bank and compare its performance to previous years. Loan book comprises of two components - loan given and loan taken • Non-Operating Expense Ratio: Non-operating expenses to total expenses is non- operating expense ratio. In case of banks, non-operating expenses would include all other expenses except interest expenses. This ratio has been included in this parameter as cost affects the prices and hence the profitability • Non-Operating Income Ratio: Non-operating income is the part of total income that comes from non-core business. Investments are converted to other assets to leverage and earn a higher rate of return. 33
  34. 34. Forward Together • Human Cost Ratio: In today’s business environment, people form the most important assets of a company. Hence, the cost incurred to manage people is also equally important. The ratio has been included in this parameter to understand human cost impact on overall performance. 3.2.1.2 Your Competitive position determines your Options How good the competitor is doing can also determine how good the organization is performing. Analyzing competitors’ Return on Assets (ROA) or Relative Market Share (RMS) will reveal where the organizations stands in the industry. This will indicate the market leaders who have been outperforming the benchmark and then the reason for their superiority. Is it because of customer loyalty, lower costs or distribution strategy? The reasons can differ from industry to industry. A similar analysis can be done for an organization performing below the benchmark. Analyzing the market growth rate is helpful in evaluating opportunities and potential in the market. The ratios under this parameter – • Return on Equity: ROE implies how profits have been generated with shareholders funds. It determines how well the reinvested earnings have been used to generate additional earnings. This ratio is widely used for comparing different organizations in the same industry • Profit Margin: It is a measure of profitability. It reflects the ability to control expenses, improve profits and performance and add value to the company • Core Income Ratio: This ratio indicates what percentage of total income is generated from operating activities i.e. operating income . 34
  35. 35. Forward Together • Return on Assets (ROA): ROA shows how profits are generated by utilizing the assets. ROA is a measure to evaluate effectiveness and profitability • Equity Multiplier: Equity multiplier reflects growth of the assets in comparison with shareholders funds. It can also be defined as measurement of financial leverage 3.2.1.3 Customers and Profit pools don’t stand still Markets have been dynamic and fragile. What is true today may not hold true tomorrow. Customer’s behavior, demands, perceptions and choices change regularly. Organizations need to change the tactics and strategy according to the changes in market. Be proactive or else be out of the market. An in-depth study of customer’s behavior and needs by segment is a necessity. This will help in planning future strategies. Keeping a track of customer loyalty and retention is equally important. Usually getting a new customer is much more expensive then retaining a customer. Different tools can be used to get an indicator of loyalty and probable retention. Based on the above analysis further strategies can be made. The trends and changes in the industry profit pool are vital. The ratios under this parameter - • Operating Expense Coverage Ratio: This ratio is calculated by dividing operating profits with operating costs. The ratio is crucial to understand the profit pool of the bank • Loans to Deposits Ratio: This ratio explains what proportion of deposits is provided as loans. This is an important ratio as lending and borrowing is a bank’s core operating activity 35
  36. 36. Forward Together • Investment Income Ratio: The ratio of non-core income (investment income) to total income is investment income ratio. Investment income is generated by investing in risky assets • Return on Book Investments: This ratio helps in understanding whether the company is generating higher returns from investments. It can also be used for comparison of two companies in the same industry • Fee Income Ratio: Ratio of fee income to total income is fee income ratio. This ratio is helpful in determining whether fee income is driving the profits 3.2.1.4 Simplicity gets Results First, analyze the degree of complexity to obtain the product and services to the customer and the relative costs to the organization. Higher degree of complexity increases the cost and reduces the customers. Also, study the impact of complexity on customer’s minds and decision-making. In general, organizations who have simplified activities and process have lower costs. Then identify innovation fulcrum – the point at which variety of products and services offer maximize sales and profits. Complex decision-making can affect the performance of an organization. Using various tools, analyze the complexity of decision-making compared to the competitors and identify the possible impact of complex decision-making in an organization. The possible impact could be the communication and feedback with distributors, suppliers and retailers. How quickly a decision can help in grabbing opportunities? A delay in decision-making could load to a lost opportunity. The competitor may be at an advantage because of simplicity in decision-making at different levels. Strategies can be devised to attack this advantage. The ratios under this parameter are: 36
  37. 37. Forward Together • Book Value: Book value is the ratio of net assets to shareholders capital. Net assets are calculated after deducting liabilities from total assets. It is an important tool for measuring the performance of an organization • Earnings per Share (EPS): EPS is used for peer-to-peer comparison. It helps an investor to make an investment decision and is an important variable in determining share prices 37
  38. 38. Forward Together 3.2.2 Data Envelopment Analysis (DEA) DEA has been conducted to measure the relative efficiencies of twelve banks (biggest banks on the basis of asset size). Measuring the efficiencies of banks is difficult because banks have multiple output and input variables. The input variables are equity, deposits and borrowings whereas the output variables are loans and advances, investments and net profits. DEA has been done with the help of Microsoft Excel add on called xIDEA. Formula – K is number of units (decision making units) k = 1,2,3,……K N is number of inputs i = 1,2,3,......N M is number of outputs j = 1,2,3,……M Ojk is observed level of output j from decision making unit k Iik is observed level of input I from decision making unit k vi is weight on input i uj is weight on output j Ek is efficiency of decision-making unit (0-1) In the formula mentioned above, researchers have used constant returns to scale model. This model does not differentiate between pure quot;technicalquot; inefficiencies and inefficiencies due to non-constant (increasing or decreasing) returns-to-scale effects, for example due to constraints in finance, competition etc. 38
  39. 39. Forward Together Analysis has been done for an input-oriented and output-oriented model. In the input- oriented model, calculations are done to find the most favorable weights as well as the efficiencies of banks. Here the objective is to improve the performance of a bank by minimizing its inputs while staying at the same level of output. This potential improvement represents the objective a bank should adopt to reach the efficient frontier and operate as an efficient bank. In the output-oriented model, calculations are done with the main objective of improving the performance of a bank by getting the most out of its outputs (using same level of inputs). Here the emphasis is on the output side. The potential improvement corresponds to a movement to the efficient frontier. 3.3 Limitations 3.3.1 Ratio Analysis • Accounting practises of different banks have led to a different understanding of their financial statements • Ratios are also susceptible to window dressing • For the purpose of similiarity, researchers have taken “Murabahat” as an interest income • Ratios indicate past performance and hence are not an accurate measure for predicting future performance 3.3.2 DEA • Biggest twelve banks have been considered on the basis of asset size (due to software limitations) • DEA is a static model • It is an extreme point method (a quantity error can skew the results) • The method computes relative efficiency (against a set of competitors). But, it does not compute an accurate level of absolute efficiency 3.3.3 Primary Research • In primary research, bankers’ opinions might be biased (due to the relationships bankers share with the concerned banks) 39
  40. 40. Forward Together 4. Analysis and Inference 4.1 Ratio Analysis 4.1.1 Cost and Prices In cost and prices parameter, researchers have focused on the factors that impact the cost and profitability of banks. Net Interest margin spread is the most important parameter for the banks and it gives a fair picture of a bank’s efficiency. In UAE, the average NIM spread in 2007 was 10%. Customer deposits is a major driver for all the banks as it directly influences the lending capacity. Customer deposits have increased by 50% from 2006 to 2007. Loans and advances, the biggest component of a bank’s core business, saw a growth of 56 % from 2006 to 2007. Total assets for banks include loan book and investments. In UAE, banks have a major exposure to investment assets. There has been a tremendous rise in the property prices over the last 3 years. 40
  41. 41. Forward Together 41
  42. 42. Forward Together 4.1.1.1 Liquid asset ratio Liquid asset ratio is used to compute the percentage of liquid assets in total assets. The 2007 industry average was 28% and NBF’s ratio had increased as compared to the industry. The industry has grown from 26 % in 2006 to 28% in 2007 whereas NBF’s liquid assets have grown from 26% in 2006 to 32% in 2007. Liquidity is one of the factors that can affect the bottom line and top line simultaneously. Liquid assets play a big role in core lending strategy of a bank. Liquid asset mix has to be optimized to attain a better net interest margin (the short term funding requirements). LIQUID ASSET RATIO 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.32 0.26 0.33 24% -22% ADIB 0.35 0.34 0.33 1% 4% ADCB 0.22 0.16 0.23 34% -27% BOS 0.40 0.43 0.44 -8% -2% CBD 0.23 0.25 0.42 -8% -42% CBI 0.22 0.28 0.36 -20% -22% DIB 0.10 0.09 0.12 7% -23% FGB 0.19 0.35 0.36 -46% -2% IB 0.40 0.37 0.35 8% 7% MB 0.41 0.26 0.27 60% -6% NBAD 0.34 0.32 0.27 8% 16% ENBD 0.22 0.17 0.17 28% 0% NBUAQ 0.36 0.11 0.18 213% -38% RAK 0.19 0.16 0.21 15% -22% SIB 0.25 0.24 0.26 5% -6% UAB 0.31 0.26 0.23 23% 10% UNB 0.27 0.28 0.34 -1% -19% AVERAGE 0.28 0.26 0.29 HGHEST 0.41 0.43 0.44 LOWEST 0.10 0.09 0.12 42
  43. 43. Forward Together 4.1.1.2 Liquidity ratio Liquidity ratio is used to analyze the liquid assets of the banks to meet the short term liabilities. The industry average decreased from 37% in 2005 to 33% in 2007. This reflected the hike in the CRR obligations of the bank i.e. the money that was to be kept with the central bank as a statutory obligation. NBF’s pattern was in line with the industry average. IB’s ratio of 51% in 2007 was the highest in the industry. This shows IB’s inefficiency to use its resources more competitively as majority of the funds are kept as liquid. LIQUIDITY RATIO 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.37 0.32 0.42 18% -25% ADIB 0.40 0.37 0.36 6% 2% ADCB 0.25 0.19 0.26 32% -27% BOS 0.50 0.58 0.66 -13% -13% CBD 0.27 0.31 0.52 -13% -40% CBI 0.26 0.33 0.41 -21% -20% DIB 0.11 0.11 0.13 6% -19% FGB 0.22 0.43 0.51 -49% -16% IB 0.51 0.48 0.46 5% 5% MB 0.47 0.30 0.33 56% -10% NBAD 0.37 0.35 0.30 7% 16% ENBD 0.24 0.19 0.19 27% -2% NBUAQ 0.45 0.16 0.29 186% -46% RAK 0.22 0.19 0.24 15% -22% SIB 0.32 0.33 0.42 -4% -22% UAB 0.40 0.33 0.30 19% 9% UNB 0.31 0.32 0.40 -3% -20% AVERAGE 0.33 0.31 0.37 HGHEST 0.51 0.58 0.66 LOWEST 0.11 0.11 0.13 43
  44. 44. Forward Together 4.1.1.3 Non-Operating Asset ratio Non-operating assets ratio is used to infer the total percentage of non-earning assets. This ratio represents the amount invested in the non-core assets. The average industry ratio was around 13% in 2007. NBF reduced its non-operating assets from 16% in 2006 to 11% in 2007. For the top three banks (UNB, UAB and CBI), non-operating assets and total assets decreased from 2006 to 2007. However, the increase in operating assets was proportionately higher as compared to increase in non-operating assets. This is a positive sign since the investment in operating assets leads to an increase in profitability. NON-OPERATING ASSET 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.11 0.15 0.16 -31% -5% ADIB 0.07 0.09 0.07 -22% 40% ADCB 0.07 0.07 0.04 2% 47% BOS 0.11 0.12 0.12 -6% -6% CBD 0.09 0.08 0.10 16% -21% CBI 0.06 0.07 0.07 -13% -4% DIB 0.71 0.67 0.75 5% -10% FGB 0.20 0.12 0.12 66% -1% IB 0.05 0.07 0.09 -25% -21% MB 0.18 0.24 0.25 -25% -3% NBAD 0.08 0.11 0.12 -25% -6% ENBD 0.18 0.21 0.23 -13% -8% NBUAQ 0.06 0.09 0.12 -34% -28% RAK 0.07 0.07 0.06 2% 16% SIB 0.15 0.17 0.09 -10% 85% UAB 0.05 0.05 0.05 4% -11% UNB 0.05 0.06 0.07 -17% -5% AVERAGE 0.13 0.14 0.15 HGHEST 0.71 0.67 0.75 LOWEST 0.05 0.05 0.04 44
  45. 45. Forward Together 4.1.1.4 Cost of Funds (%) The Cost of funds is the prima facie or the most vital figure for any banking organization as it directs the rate at which the bank raises funds. NBF’s cost of funds was in line with the industry average in 2007. However, on a deeper note, banks that had maintained a low cost of funding were able to do so because of low demand deposits and short, medium term borrowings. In our analysis, researchers have inferred that banks with lower exposure to short and medium term borrowings had lower cost of funds. COST OF FUNDS (%) 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.03 0.04 0.02 -8% 47% ADIB 0.04 0.04 0.04 -8% 15% ADCB 0.04 0.03 0.02 19% 54% BOS 0.03 0.03 0.03 -12% 27% CBD 0.02 0.03 0.02 -24% 79% CBI 0.04 0.04 0.03 -5% 44% DIB 0.03 0.03 0.02 0% 37% FGB 0.04 0.04 0.06 -15% -21% IB 0.04 0.04 0.02 1% 80% MB 0.04 0.04 0.03 3% 40% NBAD 0.04 0.04 0.03 -5% 27% ENBD 0.03 0.04 0.02 -31% 76% NBUAQ 0.02 0.02 0.02 12% 6% RAK 0.03 0.04 0.02 -5% 54% SIB 0.03 0.02 0.02 28% 34% UAB 0.02 0.03 0.06 -15% -51% UNB 0.04 0.05 0.03 -15% 49% AVERAGE 0.03 0.04 0.03 HGHEST 0.04 0.05 0.06 LOWEST 0.02 0.02 0.02 45
  46. 46. Forward Together 4.1.1.5 NIM Spread (%) NIM spread or net interest margin spread is the most crucial parameter to analyze the efficiency and profitability of banks. It is computed by the spread between the net rate of interest received and net rate of interest paid. In common man terminology, it depicts the margin from interest arbitrage. NBF’s performance was in line with the industry (consistently 3% average for the last three years). However, in the coming periods, Central bank might take strict measures to curb the inflation by increasing the statutory reserve ratio. This could hurt the profitability of banks. DIB has performed extremely well on this frontier by keeping the NIM spread of 14% in 2007. It is the biggest Islamic bank in the region. NIM SPREAD(%) 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 2.38% 2.77% 2.63% -14% -9% ADIB 2.12% 2.14% 2.86% -1% -25% ADCB 2.05% 2.09% 2.29% -2% -9% BOS 2.28% 2.25% 2.37% 1% -5% CBD 3.08% 3.38% 3.27% -9% 4% CBI 2.34% 2.77% 2.98% -16% -7% DIB 13.81% 11.85% 17.54% 17% -32% FGB 2.52% 2.55% 2.70% -1% -6% IB 2.27% 2.82% 3.01% -20% -6% MB 2.05% 2.67% 3.14% -23% -15% NBAD 1.76% 2.09% 2.01% -16% 4% NBD 1.25% 1.84% 2.93% -32% -37% NBUAQ 3.38% 4.46% 3.90% -24% 14% RAK 5.29% 4.38% 4.33% 21% 1% SIB 2.40% 3.19% 3.13% -25% 2% UAB 3.65% 4.14% 3.30% -12% 26% UNB 1.85% 1.94% 1.87% -5% 4% AVERAGE 3.21% 3.37% 3.78% HGHEST 13.81% 11.85% 17.54% LOWEST 1.25% 1.84% 1.87% 46
  47. 47. Forward Together 4.1.1.6 Loan Book Loan book is not used as a measure of ratio analysis. It is used as a measure of analyzing the industry positioning of NBF. This figure provides a brief idea on the core business efficiency and penetration level. The average industry loan book grew by 59% from 2006 to 2007. NBF’s loan book grew by 53% during the same period. The variability in the size of the banks can be analyzed through this parameter. NBD merged with Emirates to become the biggest bank in UAE on the basis of asset size. The merged entity’s loan book grew by 165% from the previous year. The concern factor for NBF is that the loan book figure was only 23 % of the average industry loan book. This could be viewed as an opportunity for future growth. LOAN BOOK 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 20,130,268 13,126,716 9,197,155 53% 43% ADIB 77,163,585 64,509,740 40,232,157 20% 60% ADCB 187,493,494 142,365,547 101,591,946 32% 40% BOS 16,822,641 11,619,810 8,713,385 45% 33% CBD 51,135,388 30,626,346 24,989,914 67% 23% CBI 18,747,789 11,959,246 8,379,943 57% 43% DIB 92,384,915 70,892,590 47,144,368 30% 50% FGB 118,399,304 79,673,500 40,994,967 49% 94% IB 13,546,063 10,633,350 9,712,203 27% 9% MB 131,072,705 83,291,021 69,141,507 57% 20% NBAD 243,015,137 170,344,203 139,174,767 43% 22% ENBD 379,003,641 142,786,755 178,328,229 165% -20% NBUAQ 14,338,589 8,095,077 5,623,236 77% 44% RAK 19,118,244 15,457,686 12,953,370 24% 19% SIB 17,225,991 11,581,281 7,816,203 49% 48% UAB 10,633,686 8,028,245 6,919,406 32% 16% UNB 98,069,648 72,277,112 60,520,095 36% 19% AVERAGE 88,723,593 55,721,660 45,378,403 HGHEST 379,003,641 170,344,203 178,328,229 LOWEST 10,633,686 8,028,245 5,623,236 47
  48. 48. Forward Together 4.1.1.7 Non-Operating Income (%) The average industry non-operating income stood at 16% in 2007. NBF’s figure was 19% during the same period. This was mainly due to less exposure to investments. Thus, a bank whose exposure to non-operating income is low is well positioned in case of an economic downtrend. NON OPERATING INCOME (%) 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.19 0.15 0.22 0.23 (0.31) ADIB 0.19 0.23 0.16 (0.17) 0.46 ADCB 0.16 0.05 0.06 2.14 (0.13) BOS 0.31 0.23 0.66 0.34 (0.65) CBD 0.17 0.06 0.23 1.79 (0.74) CBI 0.08 (1.24) 0.33 (1.06) (4.75) DIB 0.30 0.26 0.16 0.17 0.56 FGB 0.15 0.04 0.21 2.45 (0.80) IB 0.31 0.04 0.49 6.88 (0.92) MB 0.23 0.27 (0.17) NBAD 0.09 0.06 0.11 0.67 (0.50) ENBD 0.05 (0.00) 0.12 (14.35) (1.03) NBUAQ 0.24 (0.42) 0.43 (1.56) (1.98) RAK 0.06 0.06 0.02 0.03 1.75 SIB 0.06 0.15 (0.59) UAB 0.11 0.02 0.14 5.49 (0.88) UNB 0.11 0.03 0.15 3.28 (0.83) AVERAGE 0.16 (0.00) 0.23 HGHEST 0.31 0.27 0.66 LOWEST 0.05 (1.24) 0.02 48
  49. 49. Forward Together 4.1.1.8 Non-operating expense (%) Non-operating expense ratio is used to compute the cost allocation to non-core expenses as a percentage of total expenses. The average industry non-operating expenses were 39% in 2007, which are consistent with 2006 (mainly due to the expansion costs across the sector). NBF’s ratio was 30% during the same year. This ratio decreased from 44% in 2005. This proves NBF’s drive for efficiency. NON OPERATING EXPENSE (%) 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.30 0.30 0.44 1% -33% ADIB 0.28 0.22 0.24 28% -10% ADCB 0.21 0.24 0.32 -12% -25% BOS 0.27 0.26 0.40 3% -35% CBD 0.45 0.42 0.56 6% -24% CBI 0.41 0.35 0.41 17% -14% DIB 0.38 0.40 0.39 -3% 3% FGB 0.21 0.19 0.19 10% 3% IB 0.35 0.36 0.59 -5% -38% MB 0.38 0.40 0.51 -5% -22% NBAD 0.18 0.17 0.22 9% -24% ENBD 0.29 0.31 0.36 -5% -14% NBUAQ 0.45 0.50 0.56 -10% -11% RAK 0.57 0.54 0.63 6% -15% SIB 0.48 0.55 0.64 -13% -14% UAB 0.99 0.99 0.64 0% 54% UNB 0.43 0.40 0.51 9% -22% AVERAGE 0.39 0.39 0.45 HGHEST 0.99 0.99 0.64 LOWEST 0.18 0.17 0.19 49
  50. 50. Forward Together 4.1.2 Competitive Position In competitive position, the focus is on performance as compared to the industry. In this parameter, researchers have emphasized on profitability and shareholder value. The return on equity, return on capital and return on assets show a positive trend. Due to the huge IPO activity in the year 2005 and 2006, the growth in profits has reduced. Major banks have listed their shares on bourses. Thus, a lot of capital infusion took place from 2005 to 2007. During the same period, industry witnessed the merger between National Bank of Dubai and Emirates Bank. 50
  51. 51. Forward Together 51
  52. 52. Forward Together 4.1.2.1 ROE NBF’s ROE was in line with the average industry rate of 19% (NBF’s ROE was 20% - 2007). DIB’s ROE of 29% was the highest in the industry. The share in profits from associated companies increased significantly for DIB. The overall growth in the industry’s fee income decreased from 2005 to 2007 (Majority of fee income in 2005 and 2006 was due to huge volume of IPO activity). RETURN ON EQUITY 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.20 0.16 0.13 23% 23% ADIB 0.14 0.22 0.17 -35% 28% ADCB 0.21 0.23 0.22 -9% 2% BOS 0.18 0.15 0.35 15% -56% CBD 0.21 0.18 0.21 18% -14% CBI 0.20 0.01 0.36 2520% -98% DIB 0.29 0.21 0.34 35% -38% FGB 0.20 0.19 0.14 8% 34% IB 0.17 0.12 0.22 47% -47% MB 0.22 0.22 0.28 -1% -20% NBAD 0.22 0.23 0.35 -4% -34% ENBD 0.11 0.21 0.24 -48% -11% NBUAQ 0.19 0.06 0.18 212% -66% RAK 0.25 0.21 0.18 23% 13% SIB 0.14 0.10 0.09 43% 8% UAB 0.18 0.15 0.16 16% -6% UNB 0.18 0.17 0.22 5% -23% AVERAGE 0.19 0.17 0.23 HIGHEST 0.29 0.23 0.36 LOWEST 0.11 0.01 0.09 52
  53. 53. Forward Together 4.1.2.2 Profit Margin The industry’s profit margin was 64% in 2007 (whereas NBF’s profit margin stood at 68%). NBF’s profit margin was consistent with respect to other banks. BOS had the highest profit margin in the industry. It showed a consistent performance of more than 64% in the last three years. For majority of the banks, profits from investments constitute a bigger proportion. This could be a risky proposition in case of an economic downturn (as most of the investments are in forex and infrastructure projects). PROFIT MARGIN 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.68 0.68 0.64 0% 7% ADIB 0.53 0.57 0.47 -6% 20% ADCB 0.55 0.69 0.73 -21% -4% BOS 0.81 0.89 0.88 -9% 0% CBD 0.68 0.67 0.70 1% -5% CBI 0.56 0.07 0.48 755% -86% DIB 0.73 0.56 0.60 30% -7% FGB 0.73 0.75 0.75 -2% -1% IB 0.68 0.58 0.71 17% -18% MB 0.55 0.58 0.65 -5% -10% NBAD 0.68 0.71 0.76 -4% -6% ENBD 0.56 0.65 0.78 -14% -17% NBUAQ 0.69 0.50 0.77 37% -35% RAK 0.44 0.39 0.38 13% 3% SIB 0.69 0.64 0.75 7% -13% UAB 0.61 0.57 0.60 8% -5% UNB 0.70 0.66 0.68 5% -3% AVERAGE 0.64 0.60 0.67 HIGHEST 0.81 0.89 0.88 LOWEST 0.44 0.07 0.38 53
  54. 54. Forward Together 4.1.2.3 Core Interest ratio The average industry (interest income to total income) ratio is 55% in 2007. NBF outperformed the industry in two out of the last three years. It registered a ratio of 56% in 2007. The loan book of the bank showed a staggering growth of 53% and the customer deposits increased by 28% in 2007. Growth was hindered because of the 2.5 times increment in the cash deposits kept with the central bank. These cash deposits were funded by the inter-bank borrowings. Thus, efficiency ratio with respect to interest income has gone down. CORE INTREST RATIO 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.56 0.50 0.91 13% -45% ADIB 0.66 0.70 0.84 -6% -17% ADCB 0.60 0.57 0.52 5% 11% BOS 0.47 0.48 0.22 -2% 113% CBD 0.63 0.69 0.58 -9% 21% CBI 0.44 1.38 0.27 -68% 411% DIB 0.43 0.38 0.57 14% -34% FGB 0.48 0.59 0.62 -18% -5% IB 0.52 0.69 0.40 -25% 74% MB 0.31 0.31 0.31 0% -1% NBAD 0.66 0.68 0.49 -4% 39% ENBD 0.54 0.50 0.56 7% -11% NBUAQ 0.59 1.21 0.44 -51% 177% RAK 0.62 0.58 0.64 7% -10% SIB 0.54 0.70 0.70 -23% 0% UAB 0.69 0.74 0.65 -8% 14% UNB 0.64 0.58 0.41 10% 43% AVERAGE 0.55 0.66 0.54 HIGHEST 0.69 1.38 0.91 LOWEST 0.31 0.31 0.22 54
  55. 55. Forward Together 4.1.2.4 Return on Assets The overall return on assets of 3% (for the industry) is very low over the last three years. With respect to the banking industry, ROA has never been a barometer for efficiency and profitability. NBF has been a consistent performer for all three years growing at an average rate of 3% year on year basis. The best performer in the industry based on ROA was giving return of 4% on assets. RETURN ON ASSETS 2007 2006 2005 Growth 06-07 % Growth 05-06 % NBF 0.03 0.03 0.03 -4% -2% ADIB 0.02 0.02 0.02 11% 2% ADCB 0.02 0.03 0.03 -26% -20% BOS 0.04 0.04 0.10 -2% -63% CBD 0.03 0.03 0.04 -4% -11% CBI 0.03 0.00 0.05 2359% -97% DIB 0.03 0.02 0.02 23% -2% FGB 0.03 0.03 0.04 -14% -21% IB 0.04 0.03 0.05 34% -50% MB 0.02 0.03 0.04 -16% -33% NBAD 0.02 0.02 0.03 -14% -31% ENBD 0.01 0.02 0.03 -45% -28% NBUAQ 0.04 0.02 0.07 133% -75% RAK 0.04 0.03 0.03 25% 15% SIB 0.03 0.03 0.04 6% -25% UAB 0.03 0.03 0.04 3% -12% UNB 0.02 0.02 0.03 -12% -26% AVERAGE 0.03 0.02 0.04 HIGHEST 0.04 0.04 0.10 LOWEST 0.01 0.00 0.02 55

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