UAE Banks Apply Lending Brakes

Banks in the UAE are set to witness a drop in credit growth in 2015 amid a backdrop of reduced oil prices and slower regional economic growth, experts have predicted.

A recent report by ratings company Standard & Poor’s (S&P) stated that loan growth in the country will decline to about seven to eight per cent this year, compared to estimated total asset growth of 15 per cent for the rated banks in 2014.

“We expect overall lending to slow down this year as we are facing events such as lower oil prices – which are having an impact on the economy, a correction in the real estate market and continued volatility in the markets. So on the basis of all these combined, we think the banks will be a bit more selective,” S&P’s credit analyst Timucin Engin told Gulf Business.

Oil prices fell below $100 per barrel in September 2014, with the benchmark Brent crude plummeting to $51.6 per barrel on February 2 2015.

Prices have since recovered to between $55- $60 per barrel, but are still sharply lower than the $115 mark they stood at in June 2014.

“Banks in the Emirates are likely to adopt a more conservative stance toward loans to the private sector, particularly to retail, leading to a relative decline in lending growth,” S&P said.

“However, we expect lending to government-related projects to remain robust,” it added.

S&P estimates Brent prices to average $55 per barrel in 2015, $65 per barrel in 2016, and $80 per barrel in 2017 and beyond.

Although these prices are “well below” fiscal break – even for the UAE, the country has the flexibility to digest weak prices over the next two years, given its strong fiscal position, the report stated.

“Therefore, we do not foresee any meaningful change in the investment and spending targets of Dubai’s and Abu Dhabi’s governments at this stage in the next one to two years.”

TEMPERING EXPECTATIONS

Dubai’s biggest bank, Emirates NBD anticipates loan growth to average between five and seven per cent in 2015.

“Given our concentration on Dubai and it’s very little reliance on oil, we would expect good growth for Emirates NBD and the banking sector as a whole,” CEO Shayne Nelson told reporters recently.

Abu Dhabi’s First Gulf Bank expects to achieve loan growth of nine to 11 per cent in 2015, similar to 2014, while National Bank of Abu Dhabi (NBAD) anticipates loan growth in “mid- single-digits”, its Chief Executive Alex Thursby said.

RAKBANK, which saw strong loan growth of around 15 per cent last year, is targeting growth in the “low to mid teens” in 2015, according to CEO Peter England.

“I’m quite confident we can achieve it, of course subject to whether there’s a major issue with oil price or not,” he said.

“If oil prices drop further and further for the next 12 months, there will be some impact. If they stabilise where they are at and slowly climb back up – I think that sort of loan growth is achievable,” he added.

One of the main reasons is the kind of sectors the bank is exposed to England explained.

“We are very focused and targeted on retail and SME growth. A lot of growth last year also came from commercial lending – as distinct from very small business – so we have moved into mid- scale corporate lending,” he said.

He added: “The sort of customers we target, the sort of people we see day-in day out have seen no change, nothing at all [because of the lower oil prices].”

CREDIT BUREAU IMPACT?

The much-anticipated Al Etihad Credit Bureau, created to increase transparency in the market and avoid the repeat of a credit bubble in the UAE, became operational in September 2014 and formally launched in November after multiple delays.

The bureau provides data on people’s credit histories, and during its launch, officials confirmed that 90 per cent of the consumer credit data that was provided to it had been uploaded.

However banks have been slow to warmto it, partially because the bureau does not accept liability for the information.

“We are not seeing a major drop in lending,” said England. “We are not seeing a sudden change in terms of our lending processes as result of the information that we can see. To be fair a lot of this information was available before.”

While lenders need to provide data to the bureau, they can decide on whether they want to access the information – it is not compulsory for banks to rely on the bureau to make lending decisions, he said.

“We are in a risk-taking business. Every product we write we expect a certain amount of those customers not to pay us back over a period of time.”

Engin agreed that the credit bureau has not impacted lending as yet.

“It’s a good thing that the UAE came up with the bureau. But it generally takes a few years before it becomes effective because you need to pile up data – so banks begin to work together and they begin to give some of the data to the credit bureau and after a few years, the product becomes relevant,” he explained.

“I’m not sure it will have a meaningful impact anytime soon.”