Banking Industry Benchmarking

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

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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.

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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





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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





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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 "NBF".

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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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

Population (mn)

6.26.05.9

5.75.5

5.2

4.9

4.6

4.5

5

5.5

6

6.5

2005 2006 2007 2008 2009 2010 2011 2012

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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.

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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

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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

624.98

866.00

1232.72

0.00

300.00

600.00

900.00

1200.00

1500.00

2005 2006 2007

36.00%

38.00%

40.00%

42.00%

44.00%

Assets (Dh billion) Growth (%)

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.

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Assets (2005)

Assets (2006)

Assets (2007)

% growth 06-07

% growth 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 Banks

722.10 515.38 379.09 40.11% 35.95% 23.69%

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.

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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

Source: UAE Central Bank, Research report titled ‘Exciting Times Ahead’ by The National Investor dated 14th April 2008; 2007

data as of Sept 2007

61.20% 64.80% 65.00%

27.70% 25.10% 25.30%

11.10% 10.10% 9.70%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2005 2006 2007

Corporate Personal Government

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Deposit 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

39.10% 37.60% 40.30%

26.10% 25.40% 22.10%

28.60% 27.40% 27.20%

6.20% 9.50% 10.40%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

2005 2006 2007

Private sector Government and public sector 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

426.54

558.26

720.06

0.00

150.00

300.00

450.00

600.00

750.00

900.00

2005 2006 2007

0.00%

8.00%

16.00%

24.00%

32.00%

40.00%

Deposits Growth (%)

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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

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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

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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

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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.

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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.

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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

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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

Borrowings, Total Deposits

Loans and Advances,

Investments, Net Profit

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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

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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.

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3. Research Design

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.

NBF’s

comparison with

other banks

Methods of data

collection -

Secondary

HBR case study

(based on four

parameters)

Hypothetical

Best Bank

(Ratio analysis)

Peer-to-Peer

analysis (DEA)

Validation

through

Primary

research

Conclusion and

recommendation

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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

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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 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

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• 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.

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• 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

.

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• 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

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• 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:

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• 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

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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 –








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 "technical" inefficiencies and inefficiencies

due to non-constant (increasing or decreasing) returns-to-scale effects, for example due to

constraints in finance, competition etc.

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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)

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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.

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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

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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

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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

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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 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

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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%

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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 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

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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

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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

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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.

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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).

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

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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 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

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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

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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 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

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4.1.2.5 Equity Multiplier

In financial analysis, equity multiplier is stated as a catalyst for any organization’s earnings

growth (earning multiplier = total assets/total equity). It is calculated to reflect the asset sizes

as compared to the ownership funds of the business. The average equity multiplier for UAE

banks increased 0.6 times on a year-on-year basis. NBF’s equity multiplier was in line with

the industry average of 6.83 times. NBAD has the highest equity multiplier (12.43 times).

NBAD’s assets witnessed a growth of 38% in 2007 mainly due to a 39% increment in its core

business (loans and advances). NBAD also witnessed approx 15% customer deposit growth

along with a 20% equity base growth in 2007. Thus, expansion is the need of the hour.

EQUITY MULTIPLIER

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 6.83 5.47 4.53 25% 21%

ADIB 8.12 13.10 11.01 -38% 19%

ADCB 9.31 7.56 6.70 23% 13%

BOS 4.69 3.98 2.99 18% 33%

CBD 6.40 4.91 5.42 30% -9%

CBI 7.05 6.62 7.76 6% -15%

DIB 7.85 7.30 11.20 8% -35%

FGB 7.23 5.32 3.35 36% 59%

IB 4.83 4.40 4.12 10% 7%

MB 8.36 7.14 5.71 17% 25%

NBAD 12.43 11.21 11.60 11% -3%

ENBD 10.09 10.80 8.36 -7% 29%

NBUAQ 4.89 3.65 2.72 34% 34%

RAK 6.96 7.09 7.20 -2% -2%

SIB 4.89 3.62 2.51 35% 44%

UAB 4.82 4.38 4.31 10% 2%

UNB 8.27 6.90 6.67 20% 3%

AVERAGE 7.24 6.67 6.25

HIGHEST 12.43 13.10 11.60

LOWEST 4.69 3.62 2.51

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4.1.3 Customers and Profits Pool

In the customer and profit pool parameter, the focus is on usage of resources in the core and

non-core activities and profitability from the same. The idea is to segregate the profit pool in

business activities and customer segments to strategize on future growth drivers. Loans to

deposits ratio is one of the major ratios to measure a bank’s efficiency. Loans and deposits

are the function of a bank’s core business activities. Investments and income from

investments are the function of the trade off model where banks diversify their resources to

other forms of business. High returns are always associated with high risks. Thus, optimizing

the resources into different asset classes and maximizing the returns is a major challenge.

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4.1.3.1 Operating expense coverage to net core income

The average coverage of the industry decreased from 3.31 times in 2005 to 2.66 times in

2007. This is due to industry expansion, thereby leading to increased operating costs. NBF’s

coverage increased from 2.45 times to 2.66 times during the same period. BOS had the

highest coverage of 4 times. However, due to the low base of the bank, comparability would

not be justified.

OPERATING PROFIT / OPERATING COSTS

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 2.66 2.93 2.45 -9% 19%

ADIB 2.09 2.06 2.66 1% -23%

ADCB 3.17 3.90 4.84 -19% -19%

BOS 4.00 4.33 3.47 -7% 25%

CBD 2.82 3.04 2.68 -7% 13%

CBI 2.27 2.44 4.45 -7% -45%

DIB 1.64 1.80 2.56 -9% -30%

FGB 3.85 4.90 4.80 -21% 2%

IB 2.32 2.73 1.73 -15% 58%

MB 1.73 1.75 2.86 -1% -39%

NBAD 3.16 3.99 4.88 -21% -18%

ENBD 2.44 2.55 3.09 -4% -18%

NBUAQ 3.29 3.69 3.57 -11% 3%

RAK 1.99 1.97 1.89 1% 4%

SIB 2.01 1.92 2.84 5% -32%

UAB 2.71 2.78 2.63 -3% 6%

UNB 3.03 3.83 4.83 -21% -21%

AVERAGE 2.66 2.98 3.31

HIGHEST 4.00 4.90 4.88

LOWEST 1.64 1.75 1.73

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4.1.3.2 Total loans/Total deposits

The industry loan book increased by 59% in 2007 whereas deposits increased by 51%. The

average industry loans to deposits ratio was 1.04 in 2007. NBF’s loan to deposits ratio was

1.05 times in 2007. This was a good sign on the efficiency front according to the input output

theory. The best bank according to this ratio was IB. It performed significantly better than the

other banks. The main reason for IB’s performance was the ‘Due from banks’ figure which

reduced to 20% as compared to 2006. The bank utilized the same funds to maintain its

reserve with the central bank. In addition, the loans and advances increased by 21%

whereas the money collected from deposits increased by 12%. Thus, the bank was reaping

profits due to efficiency in its core businesses.

TOTAL LOANS / TOTAL DEPOSITS

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 1.05 1.04 1.10 0% -5%

ADIB 1.07 1.01 1.04 6% -3%

ADCB 1.08 1.09 1.13 -1% -3%

BOS 1.13 1.17 1.34 -4% -13%

CBD 1.09 1.17 1.12 -7% 5%

CBI 1.08 1.06 1.06 2% 0%

DIB 0.32 0.35 0.26 -10% 37%

FGB 0.95 1.09 1.26 -13% -14%

IB 1.22 1.23 1.23 -1% 0%

MB 0.96 0.90 0.93 6% -3%

NBAD 1.05 1.06 1.10 -1% -4%

ENBD 1.05 1.04 0.88 1% 19%

NBUAQ 1.18 1.21 1.41 -3% -14%

RAK 1.10 1.10 1.11 0% -1%

SIB 1.09 1.17 1.54 -7% -24%

UAB 1.21 1.23 1.23 -2% 0%

UNB 1.08 1.10 1.11 -2% -1%

AVERAGE 1.04 1.06 1.11

HIGHEST 1.22 1.23 1.54

LOWEST 0.32 0.35 0.26

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4.1.3.3 Total loan/Ownership funds

According to the input-output theory, ownership funds are one of the three sources banks

use to raise funds. When analyzed closely, this is the only source where the bank does not

have any cost obligations. Thus, it can be inferred as a ‘free of cost fund’ available with the

bank to increase its credit lending capacity. The average for the industry grew from 5.69

times in 2006 to 6.22 times in 2007. This was due to the economic boom in the last few

years. NBF’s ratio was 6.3 times in 2007 as compared to 4.54 times in 2006.

NBAD’s ratio was 11.08 times in 2007. This was mainly due to a 38% growth in its asset

book. NBAD saw growth across all core business fronts. The CAGR of NBAD was 17.75% in

the last three years. Moreover, chunk of its income comes from lending business. It is

concentrating more on the banking business through lending and business expansion.

TOTAL LOAN / CAPITAL RESRVES + EQUITY

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 6.30 4.54 3.59 39% 26%

ADIB 7.36 12.42 10.17 -41% 22%

ADCB 9.46 7.86 6.30 20% 25%

BOS 4.08 3.07 2.90 33% 6%

CBD 6.75 5.41 6.64 25% -19%

CBI 6.18 5.51 6.39 12% -14%

DIB 2.79 2.61 2.98 7% -13%

FGB 5.88 5.14 3.06 14% 68%

IB 4.36 3.88 3.58 12% 8%

MB 6.12 4.97 4.08 23% 22%

NBAD 11.08 9.72 9.95 14% -2%

ENBD 7.99 8.54 6.70 -6% 27%

NBUAQ 4.56 3.11 2.37 47% 31%

RAK 6.34 6.49 6.72 -2% -3%

SIB 4.04 2.96 2.25 36% 32%

UAB 4.87 4.27 4.11 14% 4%

UNB 7.60 6.28 6.08 21% 3%

AVERAGE 6.22 5.69 5.17

HIGHEST 11.08 12.42 10.17

LOWEST 2.79 2.61 2.25

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4.1.3.4 Investment Income (%)

As discussed earlier, 2005-2006 financial sector globally saw huge IPO activity. This

resulted in an increase in the non-core income for most of the banks. 2005-2006 also

witnessed major economic expansion in real estate and other sectors in the Middle East.

Thus, the investments of most of the banks saw capital appreciation. The industry average

income from investment was around 8% in 2007. NBF’s income from investment was about

10% in the same year. If the global economies see an economic downtrend, banks that have

a low income and asset exposure to investments would be in a better position. On this

frontier, NBF is better positioned as compared to majority of the banks in UAE.

INVESTMENT INCOME (%)

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 0.10 0.07 0.11 43% -41%

ADIB 0.06 0.07 0.05 -23% 53%

ADCB 0.09 0.02 0.02 396% -22%

BOS 0.19 0.12 0.55 50% -77%

CBD 0.06 (0.02) 0.06 -456% -130%

CBI 0.00 (0.53) 0.37 -100% -243%

DIB 0.16 0.08 0.06 103% 43%

FGB 0.10 0.03 0.14 268% -80%

IB 0.11 (0.00) 0.33 -2487% -101%

MB 0.17 0.21 - -17%

NBAD 0.02 0.00 0.05 375% -92%

ENBD 0.04 (0.00) 0.02 -1492% -112%

NBUAQ 0.16 (0.20) 0.32 -178% -164%

RAK 0.02 0.02 - -14%

SIB 0.04 0.08 - -57%

UAB 0.02 (0.03) 0.05 -158% -153%

UNB 0.05 0.01 0.11 759% -94%

AVERAGE 0.08 (0.00) 0.13

HIGHEST 0.19 0.21 0.55

LOWEST 0.00 (0.53) -

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4.1.3.5 Return on Book investments

Due to the extra liquidity with the increased inflow of petro dollars, the economy is seeing a

staggering growth in infrastructure projects. This has led to investment opportunities for all

financial institutions including banks. The industry average return on investments was 7% in

2007. NBF’s return on investments was 6% in 2007. Majority of the investments across the

banking sector are in infrastructure.

RETURN ON BOOK INVESTMENTS(%)

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 0.06 0.03 0.05 104% -40%

ADIB 0.05 0.04 0.04 19% -8%

ADCB 0.14 0.02 0.05 524% -54%

BOS 0.12 0.07 0.65 70% -89%

CBD 0.06 (0.02) 0.06 -341% -139%

CBI 0.00 (0.83) 0.47 -100% -277%

DIB 0.09 0.06 0.05 67% 8%

FGB 0.03 0.02 0.10 91% -84%

IB 0.18 (0.01) 0.40 -3553% -101%

MB 0.06 0.06 - -1%

NBAD 0.01 0.00 0.03 470% -93%

ENBD 0.01 (0.00) 0.01 -1085%

NBUAQ 0.30 (0.21) 0.38 -242% -155%

RAK 0.05 0.05 - 0%

SIB 0.03 0.06 - -60%

UAB 0.04 (0.06) 0.11 -157% -158%

UNB 0.06 0.01 0.11 847% -94%

AVERAGE 0.07 (0.04) 0.15

HIGHEST 0.30 0.07 0.65

LOWEST 0.00 (0.83) -

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4.1.3.6 Fee income (%)

Fee income is a very important income barometer for the banks as it quantifies a bank’s

advantage on its expansion network. Fee income is directly proportional to the penetration

level. The industry fee income decreased from 27% in 2006 to 21% in 2007. NBF’s fee

income has decreased from 28% in 2006 to 25% in 2007. Segmentation of fee income is not

possible due to non-disclosures by most of the banks.

FEES INCOME (%)

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 0.25 0.28 0.28 -11% -1%

ADIB - - -

ADCB 0.28 0.39 0.45 -27% -13%

BOS 0.19 0.17 0.10 9% 75%

CBD 0.20 0.24 0.19 -19% 29%

CBI 0.26 0.73 0.49 -65% 49%

DIB 0.25 0.33 0.24 -24% 37%

FGB 0.10 0.07 0.05 2.11 1.13

IB 0.16 0.26 0.10 -40% 154%

MB 0.28 0.25 0.10 13% 148%

NBAD 0.24 0.26 0.41 -5% -37%

ENBD 0.23 0.36 0.26 -38% 39%

NBUAQ 0.12 0.16 0.07 -27% 116%

RAK 0.33 0.40 0.34 -16% 17%

SIB 0.41 0.15 0.27 171% -44%

UAB 0.13 0.14 0.13 -5% 9%

UNB 0.22 0.40 0.49 -45% -18%

AVERAGE 0.21 0.27 0.23

HIGHEST 0.41 0.73 0.49

LOWEST - - -

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4.1.4 Simplicity

In case of simplicity, the focus is on net results from all the activities and the value created

for the shareholders. The ultimate goal for core and non-core activities is to generate

maximum returns for the business by optimizing resources. Net profit and earnings per share

provide a fair picture of a bank’s efficiency.

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4.1.4.1 Book Value

Mashreq bank has the highest book value per share in the industry. Its BV per share

increased from AED 9.18 in 2006 to AED 9.31 in 2007. This was due to the increase in

retained earnings, minority interest, reserves and share capital.

The average industry BV per share increased from AED 3.33 in 2005 to AED 3.64 in 2007.

NBF’s BV per share increased from AED 1.53 in 2005 to AED 1.64 in 2007. On this front,

NBF did not perform efficiently.

BOOK VALUE

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 1.64 1.58 1.53 4% 3%

ADIB 1.55 1.85 2.02 -16% -8%

ADCB 2.85 2.68 2.15 6% 24%

BOS 1.83 1.67 1.92 10% -13%

CBD 4.21 3.62 4.50 16% -19%

CBI 1.45 1.25 2.26 16% -44%

DIB 3.56 3.15 2.56 13% 23%

FGB 8.10 7.19 7.84 13% -8%

IB 1.71 1.51 2.13 13% -29%

MB 9.31 9.18 9.41 1% -3%

NBAD 6.74 6.94 7.78 -3% -11%

ENBD 5.73 3.81 4.29 50% -11%

NBUAQ 2.61 2.36 2.77 11% -15%

RAK 2.56 2.33 2.46 10% -5%

SIB 2.02 1.92 2.11 6% -9%

UAB 1.80 1.72 1.89 5% -9%

UNB 4.29 3.86 4.19 11% -8%

AVERAGE 3.64 3.33 3.64

HIGHEST 9.31 9.18 9.41

LOWEST 1.45 1.25 1.53

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4.1.4.2 Earnings per Share

Mashreq bank’s EPS of AED 1.89 in 2007 was the highest amongst the UAE banks. EPS

was more or less the same as compared to 2006. This was mainly due to the increase in

interest income, fees and commission income and investment income. However, the EPS

decreased substantially from 2005 to 2006.

The average industry EPS was AED 0.69 in 2007 as compared to AED 0.82 in 2005. NBF’s

interest income, fees and commission income (specifically letters of credit, letters of

guarantee, asset management services) and income from investments increased

consistently from 2005 to 2007. This explains a consistent growth in the EPS. NBF’s EPS for

2007 stood at AED 0.29.

EPS

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 0.29 0.24 0.19 24% 22%

ADIB 0.22 0.38 0.34 -42% 11%

ADCB 0.52 0.54 0.48 -3% 12%

BOS 0.32 0.26 0.60 26% -58%

CBD 0.83 0.57 0.88 45% -35%

CBI 0.29 0.01 0.80 2927% -99%

DIB 0.83 0.56 0.71 50% -22%

FGB 1.61 1.22 1.07 32% 14%

IB 0.29 0.18 0.46 65% -62%

MB 1.89 1.90 2.32 0% -18%

NBAD 1.51 1.62 2.74 -7% -41%

ENBD 0.63 0.81 0.98 -22% -17%

NBUAQ 0.51 0.15 0.51 245% -71%

RAK 0.65 0.48 0.45 35% 7%

SIB 0.27 0.18 0.19 50% -2%

UAB 0.30 0.25 0.30 19% -18%

UNB 0.75 0.65 0.92 17% -30%

AVERAGE 0.69 0.59 0.82

HIGHEST 1.89 1.90 2.74

LOWEST 0.22 0.01 0.19

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4.1.4.3 Earnings/Ownership funds

DIB has outperformed the industry with respect to the earnings/ownership funds. It has

created additional value by making the most of ownership funds. The average industry

earnings/ownership funds decreased from 0.23 in 2005 to 0.20 in 2007. NBF’s

earnings/ownership funds increased from 0.13 in 2005 to 0.20 in 2007.

EARNINGS / OWNESRSHIP FUND

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 0.20 0.23 0.22 -11% 1%

BOS 0.18 0.16 0.35 18% -55%

CBD 0.24 0.20 0.28 20% -29%

CBI 0.20 0.01 0.36 2518% -98%

DIB 0.31 0.22 0.33 42% -33%

FGB 0.21 0.19 0.14 9% 32%

IB 0.17 0.12 0.22 47% -47%

MB 0.20 0.21 0.25 -2% -16%

NBAD 0.22 0.23 0.35 -4% -34%

ENBD 0.11 0.22 0.24 -48% -9%

NBUAQ 0.20 0.06 0.18 218% -66%

RAK 0.25 0.21 0.18 23% 13%

SIB 0.14 0.10 0.09 43% 8%

UAB 0.18 0.15 0.17 16% -8%

UNB 0.18 0.17 0.22 5% -24%

AVERAGE 0.20 0.17 0.23

HIGHEST 0.31 0.23 0.36

LOWEST 0.11 0.01 0.09

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4.1.4.4 Investments/Ownership funds

ENBD’s investments to ownership funds ratio is the highest in the industry due to the merger

between NBD and EBIL. The ratio decreased from 1.88 in 2005 to 1.65 in 2007.

The average industry ratio was 0.67 in 2007. NBF’s investment/capital ratio has

outperformed the industry. NBF’s ratio was 0.77 in 2005 as compared to 0.74 in 2007.

INVESTMENTS / CAPITAL + RESERVES

2007 2006 2005 Growth 06-07 % Growth 05-06 %

NBF 0.74 0.92 0.77 -19% 19%

ADIB 0.52 1.22 0.76 -57% 62%

ADCB 0.34 0.39 0.21 -14% 90%

BOS 0.48 0.46 0.47 5% -2%

CBD 0.55 0.32 0.47 75% -32%

CBI 0.21 0.18 0.52 17% -66%

DIB 1.08 0.73 0.91 48% -20%

FGB 1.37 0.68 0.41 102% 65%

IB 0.23 0.29 0.36 -20% -19%

MB 1.59 1.80 1.56 -12% 16%

NBAD 1.00 1.21 1.34 -17% -9%

ENBD 1.65 2.02 1.88 -18% 7%

NBUAQ 0.22 0.25 0.27 -9% -8%

RAK 0.40 0.40 0.32 -1% 26%

SIB 0.45 0.33 0.20 36% 63%

UAB 0.23 0.22 0.24 8% -11%

UNB 0.39 0.39 0.41 -1% -4%

AVERAGE 0.67 0.69 0.65

HIGHEST 1.65 2.02 1.88

LOWEST 0.21 0.18 0.20

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Below is the ranking of banks based on the above-discussed parameters. NBAD is at the top

list and IB is at the bottom.

NBF is ranked 11th against its peers. In 2006 and 2005, it was ranked 14th and 15th

respectively.

Ranking of Banks on basis of Case Study Parameters

2007 2006 2005

NBAD 1 1 1

MB 2 2 2

FGB 3 3 3

ENBD 4 4 5

UNB 5 6 4

ADCB 6 7 9

CBD 7 8 10

DIB 8 11 6

RAK 9 9 11

ADIB 10 5 7

NBF 11 14 15

NBUAQ 12 12 12

BOS 13 13 13

CBI 14 10 8

UAB 15 15 14

SIB 16 17 16

IB 17 16 17

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4.2 Hypothetical Best Bank

Based on the case study provided by NBF, a hypothetical best bank has been created. This

competitor comprises of the best ratios under each parameter (as per the HBR case).

For calculating the hypothetical best bank, correlation between the parameters has looked

into. Researchers have considered non-correlating ratios to avoid multi co- linearity. Then,

the ratios have been normalized and a hypothetical best bank.

2007 2006 2005

BEST – Hypothetical Bank 30.22 32.57 31.77

NBF 14.41 13.14 12.22

AVERAGE 16.73 16.31 15.93

Scores of banks

2007 2006 2005

NBF 14.41 13.14 12.22

ADIB 14.68 19.92 18.70

ADCB 18.48 17.51 17.27

BOS 13.90 13.54 12.40

CBD 16.78 15.13 16.19

CBI 13.84 14.59 18.06

DIB 15.40 14.39 18.80

FGB 21.95 20.70 19.45

IB 12.23 12.21 11.27

MB 22.29 20.72 20.92

NBAD 25.66 25.57 27.79

ENBD 21.16 20.38 18.86

NBUAQ 14.39 13.55 12.57

RAK 14.86 14.59 14.79

SIB 12.47 10.92 11.76

UAB 12.93 12.43 12.23

UNB 18.90 18.03 19.22

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4.3 Data Envelopment Analysis (DEA)

The researchers have considered top 12 local banks based on 2007 total asset size to

perform DEA.

Ranking of Banks on Basis of Total Assets

NBF stands at 10th position in terms of total assets in 2007. The analysis has been done

with the help of Microsoft Excel add on called xIDEA.

Bank Total Assets (AED)

Ranking

ENBD 253,812,252 1

NBAD 139,430,718 2

ADCB 106,213,849 3

MB 87,627,397 4

DIB 83,738,759 5

FGB 73,197,545 6

UNB 55,456,725 7

ADIB 44,042,179 8

CBD 30,436,017 9

NBF 12,292,518 10

CBI 11,118,218 11

RAK 10,973,779 12

SIB 10,883,510 13

BOS 10,789,186 14

NBUAQ 8,429,051 15

IB 8,247,852 16

UAB 6,184,632 17

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Formula:








Ek is efficiency of decision making unit (0-1)

In the above formula, researchers have used constant returns to scale model. This model

does not differentiate between pure "technical" inefficiencies and inefficiencies due to non-

constant (increasing or decreasing) returns-to-scale effects, for example due to constraints

in finance, competition etc.

The analysis has been done for an input-oriented model and an output-oriented model. In

the input-oriented model, calculations are done to find the most favorable weights and the

efficiency of a bank. 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 while using same level of inputs.

Here the emphasis is on the output side. The potential improvement corresponds to a

movement to the efficient frontier.

The inputs and outputs taken by us are as follows:

Share Capital, Total

Borrowings, Total

Deposits

Loans & Advances,

Investments, Net

Profits

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Absolute values of Inputs and Outputs 2007


2006 INPUTS (AED) OUTPUTS (AED)

SHARE EQUITY

TOTAL DEPOSITS

TOTAL BORROWINGS

LOANS and ADVANCES

INVESTMENTS NET

PROFIT

ADCB 9,448,378 43,396,851 24,580,381 74,388,315 4,212,768 2,147,199

ADIB 2,606,939 23,822,065 8,283,717 32,403,958 3,394,786 571,951

BOS 2,096,500 4,845,664 509,959 6,264,187 979,001 320,122

CBD 3,332,650 13,755,671 336,423 16,534,252 1,436,985 601,372

DIB 7,361,150 47,732,482 4,649,900 18,510,208 8,166,248 1,560,093

ENBD 8,876,481 49,932,426 19,975,276 72,879,053 18,333,687 1,888,292

FGB 8,110,490 34,434,346 3,694,958 41,544,196 5,844,099 1,525,850

MB 7,377,568 34,656,125 9,100,063 39,534,833 13,599,463 1,642,742

NBAD 9,005,264 70,737,899 12,091,381 87,514,923 11,359,003 2,105,885

NBF 1,475,337 5,744,305 679,703 6,702,708 1,319,685 237,553

RAK 1,247,098 5,850,011 1,516,328 8,091,347 584,001 258,810

UNB 5,927,072 30,046,079 4,378,079 37,852,954 2,571,014 1,009,504


SHARE EQUITY

TOTAL DEPOSITS

TOTAL BORROWINGS

LOANS and ADVANCES

INVESTMENTS NET PROFIT

ADCB 10,087,512 57,160,820 32,968,640 97,364,034 3,906,419 2,084,930

ADIB 5,423,245 29,628,826 7,580,473 39,954,286 3,209,523 771,444

BOS 2,298,316 6,337,406 1,567,732 8,917,503 1,193,199 404,001

CBD 4,414,055 21,176,937 3,241,929 26,716,522 2,706,052 935,917

DIB 8,766,507 37,976,395 4,996,072 22,372,015 10,214,274 2,500,421

ENBD 25,156,871 138,646,395 46,328,057 194,029,189 43,198,710 2,770,908

FGB 9,870,425 52,256,069 8,571,207 57,572,028 14,884,704 2,008,159

MB 9,613,852 48,286,712 18,631,049 64,154,944 15,654,260 2,125,995

NBAD 11,214,232 81,736,671 36,991,757 124,286,709 11,838,245 2,505,137

NBF 1,631,985 7,955,444 1,887,065 10,287,759 1,292,599 323,848

RAK 1,577,001 7,239,466 1,876,597 10,002,181 741,989 401,388

UNB 6,567,074 40,204,419 6,905,148 50,960,081 2,849,776 1,179,351

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SHARE EQUITY

TOTAL DEPOSITS

TOTAL BORROWINGS

LOANS and ADVANCES

INVESTMENTS NET

PROFIT

ADCB 8,608,930 33,937,379 13,798,935 53,855,632 2,174,646 1,921,542

ADIB 2,014,799 18,031,034 1,702,075 20,499,048 1,481,086 344,496

BOS 1,721,698 3,720,317 1,557 4,991,511 713,721 602,806

CBD 2,629,092 10,635,879 1,154,272 13,199,763 1,483,560 550,839

DIB 3,119,205 33,391,950 4,099,357 9,653,061 3,793,612 1,065,679

ENBD 12,727,903 79,668,440 15,382,307 83,277,482 24,610,448 3,031,819

FGB 7,574,120 17,313,560 825,187 22,856,220 3,237,908 1,067,208

MB 7,258,732 30,004,792 5,795,856 33,340,859 11,508,060 2,012,072

NBAD 7,323,989 59,572,805 6,750,067 72,851,895 10,197,196 2,580,249

NBF 1,338,884 3,697,442 688,164 4,811,549 1,006,185 175,791

RAK 1,012,888 4,863,681 1,282,616 6,807,073 415,476 185,255

UNB 5,232,510 25,786,686 2,898,371 31,835,038 2,283,105 1,154,031

On further breakdown of DEA

Absolute values of Inputs and Outputs 2007 (further break down)

2007 INPUTS OUTPUTS

EMPLOYEE COSTS

CAPITAL DEPOSITS LOANS INCOME FROM

INVSTMENT

INCOME FROM FOREX

FEE INCOME

NBF 106,276 1,100,000 7,955,444 7,084,214 70,250 18,868 115,558

ADIB 376,480 1,500,000 29,628,826 24,776,022 294,712 21,709 122,831 ADCB 543,743 4,000,000 57,160,820 75,676,082 105,456 116,566 873,960 BOS 62,116 1,250,000 6,337,406 5,312,074 22,673 18,547 90,737 CBD 270,500 1,129,476 21,176,937 20,777,094 - 62,086 266,162 CBI 140,615 1,089,000 8,303,125 7,955,149 - 16,325 141,588 DIB 866,502 2,996,000 65,016,828 16,279,701 4,737,985 93,749 704,578 FGB 330,190 1,250,000 52,256,069 44,409,268 280,144 119,263 461,521 MB 828,036 1,126,054 48,286,712 35,994,974 778,334 161,425 1,091,204 RAK 209,339 616,688 7,239,466 8,172,483 28,556 28,036 275,875 SIB 132,149 1,100,000 6,977,050 6,503,299 449,257 21,296 46,322 UAB 84,485 711,715 4,122,754 3,943,807 - 29,643 42,865

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2006 INPUTS OUTPUTS

EMPLOYEE COSTS

CAPITAL DEPOSITS LOANS INCOME FROM INVSTESTMENT

INCOME FROM FOREX

FEE INCOME

NBF 73,280 1,000,000 5,744,305 5,085,091 35,503 17,069 93,800

ADIB 251,840 1,500,000 23,822,065 20,436,703 164,690 27,019 79,698

ADCB 440,218 4,000,000 43,396,851 62,424,649 (28,224) 72,076 1,129,246

BOS 47,170 1,250,000 4,845,664 3,756,627 97,259 13,744 65,256

CBD 187,200 1,052,093 13,755,671 12,642,569 - 44,807 214,502

CBI 82,888 890,004 5,273,337 4,798,696 - 13,595 94,794

DIB 636,711 2,800,000 47,732,482 14,991,239 3,119,888 36,904 869,812

FGB 224,814 1,250,000 34,434,346 25,160,769 202,168 48,513 281,638

MB 605,226 866,195 34,656,125 28,572,233 649,496 125,051 707,423

RAK 141,137 536,250 5,850,011 6,813,469 - 17,176 226,923

SIB 90,288 1,100,000 4,419,506 4,531,459 318,156 14,284 32,196

UAB 71,499 635,460 3,273,222 3,340,950 - 17,678 35,533


2005 INPUTS OUTPUTS

EMPLOYEE COSTS

CAPITAL DEPOSITS LOANS INCOME FROM INVSTESTMENT

INCOME FROM FOREX

FEE INCOME

NBF 62,087 904,737 3,697,442 3,205,992 43,612 14,857 73,867

ADIB 145,818 1,000,000 18,031,034 13,359,198 35,102 7,774 47,832 ADCB 311,675 4,000,000 33,937,379 42,164,061 66,219 67,005 1,092,970 BOS 51,548 1,000,000 3,720,317 2,502,352 10,241 13,027 64,856 CBD - 627,487 10,635,879 9,342,851 - 26,244 147,207 CBI 54,356 299,115 4,065,249 2,965,815 - 7,811 154,083 DIB 335,226 1,500,000 33,391,950 5,657,841 2,079,962 15,930 385,364 FGB 138,252 1,000,000 17,313,560 13,603,789 273,370 29,247 71,124 MB 499,065 866,195 30,004,792 22,269,429 1,137,848 90,164 575,323 RAK 109,247 412,500 4,863,681 5,343,300 - 10,728 148,417 SIB 60,859 1,000,000 2,946,811 3,468,207 262,721 9,202 25,725

UAB 62,190 508,368 2,905,501 2,951,741 - 15,676 30,407

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Ranking of Banks based on Inputs and Outputs - 2007

INPUTS OUTPUTS

SHARE EQUITY

TOTAL DEPOSITS

TOTAL BORROWINGS

LOANS and ADVANCES

INVESTMENTS NET

PROFIT

ADCB 3 3 3 3 6 5

ADIB 8 8 6 7 7 8

BOS 10 12 12 12 11 10

CBD 9 9 9 8 9 8

DIB 6 7 8 9 5 3

ENBD 1 1 1 1 1 1

FGB 4 4 5 5 3 6

MB 5 5 4 4 2 4

NBAD 2 2 2 2 4 2

NBF 11 10 10 10 10 12

RAK 12 11 11 11 12 11

UNB 7 6 7 6 8 7

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After performing DEA, the output given for efficiency levels is as follows:

Efficiency Score

In the chart provided above, NBF has turned out to be an inefficient bank as compared to its

peers. The efficient banks have a score of 1. The score of NBF was 0.9763 in 2007. This

means that inputs need to be reduced by 3.27%. By doing so, NBF can move to the efficient

2007 2006 2005

ADCB 1.0000 1.0000 1.0000

ADIB 0.9918 1.0000 1.0000

BOS 1.0000 1.0000 1.0000

CBD 1.0000 1.0000 0.9541

DIB 1.0000 1.0000 0.9698

ENBD 1.0000 1.0000 1.0000

FGB 1.0000 0.9894 0.9752

MB 1.0000 1.0000 1.0000

NBAD 1.0000 1.0000 1.0000

NBF 0.9673 1.0000 1.0000

RAK 1.0000 1.0000 0.9844

UNB 1.0000 0.9851 0.9682

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frontier. Then, the researchers have inferred on the efficient peers and weights (chart

provided below).

Efficiency Score (further break down)

2007 2006 2005

NBF 0.8389 0.9678 1.0000

ADIB 0.8124 0.8023 0.8422

ADCB 1.0000 1.0000 1.0000

BOS 1.0000 1.0000 0.9308

CBD 0.9811 1.0000 1.0000

CBI 0.7589 0.8232 1.0000

DIB 1.0000 1.0000 1.0000

FGB 1.0000 1.0000 0.9113

MB 1.0000 1.0000 1.0000

RAK 1.0000 1.0000 1.0000

SIB 1.0000 1.0000 1.0000

UAB 1.0000 1.0000 1.0000

Efficient Peers and weights

Peer Weight Peer Weight Peer Weight Peer Weight Peer Weight

ADCB ADCB 1.0000

ADIB ADCB 0.0988 CBD 0.4846 ENBD 0.0167 UNB 0.2777

BOS BOS 1.0000

CBD CBD 1.0000

DIB DIB 1.0000

ENBD ENBD 1.0000

FGB FGB 1.0000

MB MB 1.0000

NBAD NBAD 1.0000

NBF BOS 0.0038 CBD 0.1341 ENBD 0.0140 FGB 0.0026 RAK 0.3808

RAK RAK 1.0000

UNB UNB 1.0000

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Graphic representation of NBF to efficient peer

As discussed above, NBF is an inefficient bank in the given circumstances. The next set of

inferences is based on how to improve NBF on relative terms by moving it to a point on the

efficient frontier. For NBF, the set of suitable efficient units is called its reference set, or

simply the set of its efficient peers such as ENBD, FGB, CBD, BOS and RAK Bank. These

banks are treated as peers for efficiency calculation, as they are the closest efficient banks

to NBF. The “efficient peers and weights chart” contains information about the efficient peers

of NBF and the relevant weights (lamda values). The objective for the inefficient bank NBF

is to become, roughly speaking, 0.38% of BOS plus 13.41% of CBD plus 1.4% of ENBD plus

0.26% of FGB plus 38.08% of RAK. When the coefficient is close to 1, the information

becomes useful to management. The management at NBF has to adopt methods and

practices from the efficient units as a few changes can lead to an efficient bank. Further, the

virtual or ideal inputs and outputs for each bank have been calculated.

National Bank of

Fujairah lies

below the

efficient frontier

Efficient peers like

ENBD, CBD, RAK,

BOS, and FGB lie on

the efficient frontier

Inputs (share equity, total

borrowings and total

deposits)

Relative distance

from the efficient

frontier defines

efficiency. Also

the nearest bank

on the efficient

frontier becomes

efficient

comparison peer.

The gap between

the efficient peer

and NBF is the

improvement

potential

Efficient

Frontier is the

observed

tradeoff among

inputs and

outputs within

the given set of

banks

Outputs (Loans, Investm

ents,

Net profits)

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Virtual Inputs for Efficiency for 2007

Virtual Inputs for Efficiency for 2007 (break down)

SHARE EQUITY

(AED ‘000) TOTAL DEPOSITS

(AED ‘000) TOTAL BORROWINGS

(AED ‘000)

ADCB 10,087,512.00 0.00% 57,160,820.00 0.00% 32,968,640.00 0.00%

ADIB 5,379,009.69 0.82% 29,387,154.83 0.82% 7,518,642.17 0.82%

BOS 2,298,316.00 0.00% 6,337,406.00 0.00% 1,567,732.00 0.00%

CBD 4,414,055.00 0.00% 21,176,936.00 0.00% 3,241,929.00 0.00%

DIB 8,766,507.00 0.00% 37,976,396.00 0.00% 4,996,072.00 0.00%

ENBD 25,156,872.00 0.00% 138,646,400.00 0.00% 46,328,056.00 0.00%

FGB 9,870,425.00 0.00% 52,256,068.00 0.00% 8,571,207.00 0.00%

MB 9,613,852.00 0.00% 48,286,712.00 0.00% 18,631,048.00 0.00%

NBAD 11,214,232.00 0.00% 81,736,672.00 0.00% 36,991,756.00 0.00%

NBF 1,578,545.98 3.27% 7,694,944.87 3.27% 1,825,273.52 3.27%

RAK 1,577,001.00 0.00% 7,239,466.00 0.00% 1,876,597.00 0.00%

UNB 6,567,074.00 0.00% 40,204,420.00 0.00% 6,905,148.00 0.00%

EMPLOYEE COST CAPITAL DEPOSITS

NBF 89,150.68 16.11% 410,824.44 62.65% 6,673,502.91 16.11%

ADIB 305,026.68 18.98% 1,218,550.81 18.76% 24,069,487.67 18.76%

ADCB 543,743.00 0.00% 4,000,000.00 0.00% 57,160,820.00 0.00%

BOS 62,116.00 0.00% 1,250,000.00 0.00% 6,337,406.00 0.00%

CBD 265,398.81 1.89% 1,108,175.87 1.89% 20,777,572.83 1.89%

CBI 98,417.70 30.01% 471,083.40 56.74% 6,300,951.14 24.11%

DIB 866,502.00 0.00% 2,996,000.00 0.00% 65,016,828.00 0.00%

FGB 330,190.00 0.00% 1,250,000.00 0.00% 52,256,068.00 0.00%

MB 828,036.00 0.00% 1,126,054.00 0.00% 48,286,712.00 0.00%

RAK 209,339.00 0.00% 616,688.00 0.00% 7,239,466.00 0.00%

SIB 132,149.00 0.00% 1,100,000.00 0.00% 6,977,050.00 0.00%

UAB 84,485.00 0.00% 711,715.00 0.00% 4,122,754.00 0.00%

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Virtual Outputs for Efficiency for 2007

The results of virtual inputs and outputs are based on input model and output model. The

first column contains the target value for inputs/outputs. It also shows the value by which

inputs/outputs have to be decreased/increased respectively. The percentage decrease in

inputs needs to be 3.27% and the percentage increase in outputs needs to be 3.39% to

make NBF an efficient bank.

Virtual Outputs for Efficiency for 2007 (break down)

LOANS INCOME FROM

INVESTMENTS

INCOME FROM FOREX

FEE

INCOME

NBF 8,445,050 19.21% 83,744 19.21% 22,492 19.21% 137,756 19.21%

ADIB 30,498,548 23.10% 362,781 23.10% 73,807 239.99% 525,756 328.03%

ADCB 75,676,080 0.00% 105,456 0.00% 116,566 0.00% 873,960 0.00%

BOS 5,312,074 0.00% 22,673 0.00% 18,547 0.00% 90,737 0.00%

CBD 21,176,447 1.92% 161,860 63,279 1.92% 351,882 32.21%

CBI 10,482,956 31.78% 20,805 21,723 33.07% 186,578 31.78%

DIB 16,279,701 0.00% 4,737,985 0.00% 93,749 0.00% 704,578 0.00%

FGB 44,409,268 0.00% 280,144 0.00% 119,263 0.00% 461,521 0.00%

MB 35,994,976 0.00% 778,334 0.00% 161,425 0.00% 1,091,204 0.00%

RAK 8,172,483 0.00% 28,556 0.00% 28,036 0.00% 275,875 0.00%

SIB 6,503,299 0.00% 449,257 0.00% 21,296 0.00% 46,322 0.00%

UAB 3,943,807 0.00% 0 29,643 0.00% 42,865 0.00%

LOANS and ADVANCES

(AED ‘000) INVESTMENTS (AED ‘000) NET PROFIT (AED ‘000)

ADCB 97,364,032.00 0.00% 3,906,419.00 0.00% 2,084,930.00 0.00%

ADIB 40,282,861.44 0.82% 3,235,917.02 0.82% 1,041,748.31 35.04%

BOS 8,917,503.00 0.00% 1,193,199.00 0.00% 404,001.00 0.00%

CBD 26,716,522.00 0.00% 2,706,052.00 0.00% 935,917.00 0.00%

DIB 22,372,016.00 0.00% 10,214,274.00 0.00% 2,500,421.00 0.00%

ENBD 194,029,184.00 0.00% 43,198,712.00 0.00% 2,770,908.00 0.00%

FGB 57,572,028.00 0.00% 14,884,704.00 0.00% 2,008,159.00 0.00%

MB 64,154,944.00 0.00% 15,654,260.00 0.00% 2,125,995.00 0.00%

NBAD 124,286,712.00 0.00% 11,838,245.00 0.00% 2,505,137.00 0.00%

NBF 10,636,033.78 3.39% 1,336,357.75 3.39% 334,811.31 3.39%

RAK 10,002,181.00 0.00% 741,989.00 0.00% 401,388.00 0.00%

UNB 50,960,080.00 0.00% 2,849,776.00 0.00% 1,179,351.00 0.00%

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The above graph shows the actual versus the virtual inputs and outputs. Overall, NBF is just

marginally inefficient and was an efficient bank in the year 2006 and 2005 when compared to

the same set of peers.

DEA is not a faultless predictor as it is based on the absolute values of the given year. The

other limitation in DEA is that the software can consider only 12 banks at a time. In addition,

researchers have used constant returns to scale model and not a variable scales to return

(thereby limiting efficiency scale).

Below is the movement matrix that shows the movement NBF needs to undertake to move

to a higher efficiency level. As the results show inefficiency, NBF’s future growth could be

hampered. DEA results are not able to predict the wrong steps taken but only show the

impact.

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Efficiency and profitability matrix

Under-performing

low on profitability Units for closure

Best practice

comparison group

Under-performing

potential is there

High Profit

Low Profit

High Efficiency Low Efficiency

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4.4 Primary Research – Validation of Secondary

In order to validate the study and understand the industry dynamics, primary research was

carried across seven bankers representing five different banks. The key findings from

primary research are summarized below:

4.4.1 Industry specific summary

• UAE is an over banked economy with close to fifty banks and the competition is

getting tougher

• Local banks benefit due to name lending. This can be explained by the nature and

magnitude of government stakes in most of these banks

• Islamic banking is a $2 trillion industry worldwide. Local banks are trying to tap this

growing segment

• Over 70%-80% of the businesses in UAE are family owned. Key industry strategies

are focused towards that particular segment

• Local banks have made huge revenues in 2005 and 2006 due to the boom in capital

markets. Since then, the industry has not seen that kind of capital market activity

• The sector will witness consolidation in the next three-five years. The banks will focus

on inorganic growth for expanding their reach and countering competition

4.4.2 Individual bank specific summary

• ADCB is very aggressive in the mortgage market. Its key focus is towards retail

clients. ADCB and Macquarie have recently entered into a foreign exchange

agreement, the benefits of which will be realized in the next two-three years. The

bank is planning to enter Islamic banking soon. It is also gaining market share in real

estate, fleet and aircraft financing

• ENBD, the biggest bank in the region, is focusing its attention on e-banking and

wealth management. ENBD is still in the process of consolidating its operations (after

the merger between Emirates bank and NBD). It had huge cash profits last year. It

intends to make use of these funds for acquisitions/mergers. It is also very active in

the real estate market through its real estate fund. The bank foresees a growth in the

SME banking segment. ENBD is active in Sukuk issuance and loan syndication.

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ENBD’s Islamic division, Emirates Islamic bank grew 300% last year and accounted

for almost half of the revenues

• FGB’s investments are leading to a higher profitability. Majority of its investments are

exposed to the real estate market. There has been a significant boom in the real

estate market over the last three years. This means that a probable decline in real

estate prices will affect FGB

• Mashreq bank, the biggest private bank in UAE, specializes in project and contract

financing. Its biggest client is Emaar. It has a good market share in trade financing,

namely PDC discounting and LC discounting. Its focus areas for the future include

SME banking. UAE’s SME banking segment is estimated at AED 15 mn. Mashreq

has a low exposure to real estate. So, it will not be affected by the probable slump in

the real estate market* (*Industry analysts believe that the UAE real estate prices are

inflated. The analysts are expecting a price correction in the near future). The bank is

trying to gain exposure in the international markets. As of now, it has representative

offices outside GCC. However, it has expanded its reach in the GCC region

(especially Qatar). It is eyeing acquisitions in Egypt. Mashreq bank’s Islamic banking

subsidiary, Badr Al Islami has grown at an annual rate of 15% since its inception (in

2006)

• Noor Islamic bank, the new entrant in the industry, is making huge strides. It has

recently entered into a strategic agreement with Empost (Emirates Post). Its clientele

also includes RAK Chamber of Commerce

• RAK bank has always focused on retail banking activities. Ethos consultancy named

it the best retail bank in terms of service quality. RAK is planning to expand its

operations in personal mortgages, credit cards and SME banking. It has a relatively

small balance sheet size as compared to its competitors. Big banks have started

expanding their retail operations. This means that RAK will have to compete on

pricing. This might lead to decline in its margins. RAK also intends to enter into

Islamic banking and real estate activities

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4.5 Overall Inferences

• Advantage of Islamic Banks

Islamic banks are outperforming the industry benchmarks because of their high NIM spreads

and better profit margins. Dubai Islamic bank being the biggest Islamic bank of the region is

leading the pack among out-performers. Its NIM spread of 14% is the highest in the industry.

Profit margins of Islamic banks show their efficiency in usage of resources. DIB’s component

of liquid assets in total assets is only 10%, which is the lowest in the industry. DIB’s high

profitability can also be attributed to the fact that the usage of resources was more towards

non-core assets generating higher returns.

• Banking on size

ENBD is outperforming the industry on asset size and loan book. It is not the best bank on

the margins frontier but the volumes compensate for them. Due to its huge lending

capability, the big-ticket deals fall in its pocket. ENBD’s asset and loan book size can also be

attributed to its presence in the retail-banking domain. On one hand, retail banking helps to

raise low cost funds in the form of customer deposits and on the other hand, banks are

better positioned to sell other banking and investment products.

Majority of the vessel financing in the region is done by ENBD. ENBD has been one of the

major beneficiaries of aircraft financing (Emirates airlines). Three years ago, Emirates bank

group launched its wholly owned subsidiary Emirates Islamic bank venturing into Islamic

banking. Total asset size of EIB was AED 17 bn in 2007.

• Brand helps in profitability

Mashreq Bank is one of the major players in the UAE banking industry. It is the second

oldest commercial bank in UAE. Al-Ghurair group of Dubai controls this bank. Mashreq Bank

has out performed the industry in wealth creation. Its book value per share has been the

highest in the industry over the last three years. Mashreq bank operates its business under

47 branches and its presence is not restricted to UAE only.

Capital market activity (IPO) was a major growth driver for Mashreq bank in 2005 and 2006.

In 2007, the bank has done exceptionally well in the loan syndication segment. In 7 out of 10

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big deals in 2007, Mashreq bank was a part of the consortium. Recently, the bank has also

started looking for opportunities in GCC for expansion. Its high profitability margin can be

attributed to its increased income from fees and commissions segment. Mashreq has been

very active in the small and medium enterprises segment which is seen as one of the

industry growth drivers.

• Young and aggressive

In the last three years, small and medium banks like Bank of Sharjah and National Bank of

RAK have expanded in the local markets. These banks have a lower asset base as

compared to the industry leaders. However, both these banks are aggressively competing in

the market on supplementary businesses such as credit cards and Investment products.

• Risks are directly proportional to rewards

UAE being an over banked economy, majority of the banks are exposed to the real estate

market. Investment assets mostly comprise of real estate and forex products. Most of the

banks enter into mortgage and real estate leasing through their subsidiaries, which exposes

them to the risk associated with the real estate market. This is inferred from banks such as

FGB and ENBD. These banks have high investments in the real estate market, which have

reaped high returns (due to the real estate boom).

• IPO boom

In 2005 and 2006, overall profitability of the banks saw a rise due to the IPO volume. The

overall growth in 2007 decreased due to bad equity markets affecting the fees and

commission income.

• Real estate boom

UAE has been witnessing real estate boom over the last three-four years. Banks have also

benefited from the same. Asset backed loans constitute a majority of loans and advances.

Most of the banks enter into mortgage financing and real estate leasing through their

subsidiaries.

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• Name Lending

Primary research suggests that the impact of name lending is quite significant in the books

of banks. Most of the banks are owned either by the government or by influential family

groups. Thus, the bank closer to the influential group or the government gets a priority in the

financial deals. Ajman, one of the seven emirates of UAE, is coming up with its own bank

because of a huge real estate development.

• Conservative Approach

UAE is a transit country and majority of the population comprises of expatriates. Thus, banks

are very conservative in providing loans to them with a higher risk. The total percentage of

non-performing assets to total assets is about 0.30%, which is low by any standards. Banks

focus on asset-backed loans as compared to other forms of loans (due to low risks in asset-

backed loans). Banks have reaped profits and margins due to the boom in real estate

market. In the coming period, keeping up with the rate of growth would be a big task for all

banks because of their base effect and conservative approach to newer segments.

4.6 Articles, Reports - Validation of Primary and Secondary Research

ADCB article

Title: “ADCB earnings rise to Dh517m on new initiatives”

Source: http://archive.gulfnews.com/articles/08/04/24/10208038.html

Dated: 24th April, 2008

“ADCB also targeted small and medium-sized enterprises by launching an SME Card. The

card is the first of its kind in the UAE and offers easy payment options and a revolving credit

facility tailored to small-and-medium sized businesses, which comprise the bulk of business

operating in UAE."

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DIB article

Title: “Dubai Islamic Bank profit jumps on property loans”

Source: http://islamicfinancearabia.com/?p=55


“Dubai Islamic Bank, the Gulfs third-largest bank that complies with Islamic law, said first-

quarter profit rose 31 percent after lending more, especially to the UAE booming realty-

sector.

“During the same period, the bank financed new projects in the contracting sector worth 12

billion dirhams, demonstrating DIBs leading position in the vital real estate sector,”

Mohammed al-Shaibani, Dubai Islamics chairman, said in the statement.”

ENBD article

Title: “Emirates NBD tops in UAE syndicated loans”

Source: http://www.gulfnews.com/business/Banking_and_Finance/10211035.html

Dated: 6th May, 2008

“Emirates NBD, the biggest bank in the Gulf by assets now tops the league table for

syndicated loans in the UAE for the first four months of this year.”

FGB article

Title: “First Gulf Bank- Business profile”

Source: http://www.zawya.com/cm/profile.cfm/cid426887

Dated: 27th February, 2008

“In 2001, FGB established its Real Estate Department as a support service to the Corporate

Banking Group. With offices across the UAE (in Abu Dhabi, Dubai, Sharjah and Al Ain), the

department's main activities include management and leasing, accounting, maintenance and

advisory services. The department also incorporated design and development of projects in

addition to selling properties within its scope of services. FGB announced its plans to

develop the AED200 million Stars Residential Tower in Dubai, which will commence in late

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2007 and is expected to be completed early 2009. Moreover FGB launched in November

2006 the ‘Burj Al Nujoom’ 395 unit residential project.”

Mashreq Articles

Title: “Depa partners with Mashreqbank, HSBC for Dh597mn Burj Dubai project”

Source: http://business.maktoob.com/NewsDetails-20070423091489-

Depa_partners_with_Mashreqbank_HSBC_for_Dh597mn_Burj_Dubai_project.htm


“Mashreqbank has the largest specialized contractor-financing unit in UAE and has long

standing expertise in assisting companies with their project needs in the region. Over the

past 10 years, Mashreqbank has assisted local and International contracting companies in

financing over 1,000 projects with an aggregate value in excess of AED100 billion.”

Title: “mashreq plans to bid for Egypt bank”

Source: http://archive.gulfnews.com/articles/07/09/17/10154153.html

Dated: 17th September, 2007

“UAE-based mashreq (Mashreqbank) is considering a bid for a substantial stake in Egypt's

state-owned Banque du Caire as part of its plans to expand in Egypt, the Cairo-based Al

Alam Al Youm newspaper reported yesterday. Egypt is privatising Banque du Caire and has

said it expects to raise more than $1.6 billion for the bank in an auction.”

Noor Islamic Bank article

Title: “Noor Islamic Bank leads Ijara facility for AIG Global real estate”

Source: http://www.joneslanglasalle.eu/en-

gb/news/2008/Noor_Islamic_Bank_Leads_Ijara_Facility_for_AIG_Global_Real_Estate.htm

Dated: 21st April, 2008

“Hussain Al Qemzi, Group CEO, Noor Islamic Bank said: We are committed to providing

world-class Shari’ah-compliant solutions for our customers. This highly successful first

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syndication attests to the strong endorsement of our brand, the leading role NIB can play in

supporting the growth of key sectors, and the growing importance and diversification of

Islamic finance in the region. The transaction attests to the maturity and experience of NIB’s

corporate and investment banking teams and is a tribute to AIG Global Real Estate’s

willingness to innovate.”

RAK Bank article

Title: “RAKBANK's Q1 Results Announcement 2008”

Source: http://www.zawya.com/story.cfm/sidZAWYA20080420133541

Dated: 31st March, 2008

“The branch network has doubled. RAKBANK has introduced one of the fastest growing

credit-card and mortgage loan product businesses in the UAE. Its wealth management

division has expanded its client footprint across the UAE and galvanised the mobilization of

deposits as well as introduced a spectrum of sophisticated yet risk controlled investment

products. The bank has accessed high net worth investor constituencies who had hitherto

been serviced exclusively by global banks and asset managers.”

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5. Conclusion and Recommendations

• Expansion in GCC

One of the major focuses of NBF should be to position itself as a GCC bank rather than

a UAE bank. NBF should expand its foothold in other GCC countries by mergers or

acquisitions.

• NBF should venture into retail banking

Retail banking would help NBF build a brand name for itself in a larger customer pool.

This would also lead to diversification of business risk as the number of customers

increase.

Customer deposits are low cost inputs to a bank’s fund requirements. Thus, deposits can

have a huge impact on efficiency and profitability. In modern times, income from

supplementary services is growing with better profit margins. Exploring new territories

along with the retention of existing clients is the most important objective.

• Focus on Wealth Management in GCC

Wealth management would see a lot of demand and new opportunities. With oil rising to

all time highs, money would be flowing into the GCC. The increasing demand of Islamic

products in these economies can be seen as an opportunity. Wealth management is not

restricted only to the wealthy individuals.

• Asset Backed Financing (vessel and aircraft financing)

Asset-based financing is one of the major growth drivers for the banks. It is also safe as

the asset backs the loan. Margins are not high on these loans but the transaction amount

is huge. Thus, the business is played on volumes.

• Special Banking Products

NBF should look into new business opportunities in UAE (such as student banking

services). At first, it may look like a small opportunity. However, in a country where more

than 50% of population is below 25 years of age, the business generated by this

segment could turn out to be one of the major growth drivers. In addition, it would help

NBF position itself among these perspective customers at an early stage.

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• Focus on insurance and asset management business

NBF should move up the value chain and do business that has high growth potential.

The focus should be on having one’s own asset and insurance management company.

This would lead to higher income and economies of scale.

The road ahead……..Neural Network and Fuzzy Logic

A major shortcoming of DEA analysis is that it provides weights on its own. Recently neural network

has also been used for the benchmarking purposes. A neural network is an intelligent analysis

system that has to be initially trained on the various possible algorithms. Over a period, the neural

system begins to think for itself and when a set of data is presented to it, it picks the best possible

algorithm for the problem at hand. A second stage neural network, which is still in its nascent stage,

can push all limits. It has the capability to mix and match different algorithms to come out with an

optimum solution by itself. This could be a stepping-stone towards artificial intelligence.

Neural network has been used in a study to measure the efficiency of Italian banks. University of

Macedonia, Greece conducted the study to measure the productivity of 100 banks during 2000-

2001. The study concluded that efficiencies of these banks had increased by 3.5% during the period.

It also indicated on which parameters a particular bank was less efficient.

University of Sharjah conducted a study to determine the profitability of 15 UAE based commercial

banks using fuzzy logic. It was concluded that the overall efficiencies of banks were higher than their

operational efficiencies.

In today’s technological and competitive environment, banks are using multiple tools for

benchmarking purpose. Fuzzy Logic is one the latest tools used by banks in addition to DuPont and

DEA.

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Abbreviations

ADIB Abu Dhabi Islamic Bank

AED United Arab Emirates Dirham

ADCB Abu Dhabi Commercial Bank

BOS Bank of Sharjah

B2B Business-to-business

BVS Book Value per Share

CAGR Compounded Annual Growth Rate

CBD Commercial Bank of Dubai

CBI Commercial Bank International

CEO Chief Executive Officer

CRR Cash Reserve Ratio

DEA Data Envelopment Analysis

DIB Dubai Islamic Bank

EBIL Emirates Bank International Limited

EIU Economist Intelligence Unit

Empost Emirates Post

EMTN Euro Medium Term Note

ENBD Emirates NBD

EPS Earnings per Share

FGB First Gulf Bank

GCC Gulf Cooperation Council

GDP Gross Domestic Product

HBR Harvard Business Review

IB Invest Bank

IPO Initial Public Offering

MB Mashreq Bank

NBAD National Bank of Abu Dhabi

NBF National Bank of Fujairah

NBUAQ National Bank of Umm Al Qaiwain

NIM Net Interest Margin

RAK National Bank of Ras Al Khaimah

RMS Relative Market Share

ROA Return on Assets

ROE Return on Equity

SIB Sharjah Islamic bank

SME Small and Medium Enterprises

UAB United Arab Bank

UAE United Arab Emirates

UNB Union National Bank

US United States

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Bibliography

• Abu Dhabi Stock Exchange (www.adsm.ae)

• DEA Zone (www.deazone.com)

• Dubai Financial Markets (www.dfm.ae)

• Economist (www.economist.com)

• HBR case study titled ‘The new leader’s guide to diagnosing the business’

• Research report titled ‘Exciting Times Ahead’ by The National Investor dated

14th April 2008

• Research report titled ‘UAE Banking Sector Review’ by Beltone dated 17th

December 2007

• Research report titled ‘Core Earning Lead to Growth’ by Global Investment

House dated January 2007

• Respective Annual Reports

• Reuters

• UAE Central Bank (www.centralbank.ae)

• Wikipedia (www.wikepedia.com)

• xIDEA software

Banking Industry Benchmarking

Education

Transcript of Banking Industry Benchmarking