UAE Banks Cash In On Euro Disaster

FEARS

The rise in lending by local banks suggests that so far at least, fears that a pullback by European banks would create a shortage of funding and hurt the UAE economy are overblown.

According to a March report by Moody’s Investors Service, quoting Bank for International Settlements data, a funding gap could emerge because European bank lending extended to the UAE as of September 2011 was worth 25 percent of the country’s total 2011 GDP of $358 billion.

In addition to cutting back new lending commitments, European banks have been selling off parts of their regional loan books to raise money and reduce their risk-weighted assets.

So some of the local banks’ lending growth is due to purchases of loans in the secondary market rather than new facilities for local borrowers. However, a significant amount of the growth appears to be organic.

“We’re not going to meet targets by going out and buying loans from retreating banks because there is no relationship traction to that,” Michael Tomalin, chief executive of National Bank of Abu Dhabi, which posted loan growth of 2.1 percent in the first half, told a July analysts call.

Investors have responded positively to local banks’ performance. FGB’s share price was up 17.5 per cent in the month to Aug. 15, with Union National Bank gaining 14.8 per cent and Emirates NBD up 14.1 per cent.

All indicators of the health of the local banking sector have improved, said Julian Bruce, director of institutional equity sales at EFG-Hermes.

“There’s an increase in both loans and deposits, spreads are okay and there is a slight slow-down in provisions, with non-performing loan ratios also looking healthier,” he said.

Loan loss provisioning has been the bane of the UAE banking system since Dubai World asked to restructure $25 billion of debt in November 2009.

Some banks remain constrained by fresh impairments – most notably ENBD, which has posted a fourth straight drop in quarterly profit because of provisions linked to state-linked entities.

For Abu Dhabi-based banks, though, the picture is improving; UNB’s quarterly provisions were down 20.5 per cent year-on-year.

Future lending growth is likely to remain moderate, however, both because lessons have been learned from past mistakes and since loan-to-deposit ratios in the UAE are already high – for many banks, over 100 per cent.

This will make banks picky over borrowers, said one Gulf-based banking analyst.

REGULATORY BURDEN

Since the start of July, UAE interbank lending rates have sunk to their lowest levels since 2004 on the back of loose liquidity in the local and global economies.

While this trend could cut banks’ profit margins on corporate lending, lower borrowing rates are also likely to encourage more companies to raise new loans. Increased demand will be welcomed because new regulation has placed a number of curbs on lending by UAE banks, especially to retail borrowers.

“The continuation of the uncertainty prevailing in the euro zone, when combined with the increasingly enhanced regulatory regime in the UAE, means we continue to anticipate limited quality credit opportunities and a resultant subdued growth in profits for the balance of 2012,” Tirad Mahmoud, chief executive of Abu Dhabi Islamic Bank, said last month.

Domestic banking rules announced this year include caps on lending to sovereign and government-related entities, a requirement to hold liquid assets worth 10 per cent of liabilities and further debt forgiveness for UAE citizens.
The impact of heightened regulation is already being felt, with UNB citing lending restrictions to individuals brought in last year for a 14 per cent drop in fee and commission income in the second quarter compared with the same period last year.

But with sentiment in the UAE economy improving, especially as the real estate sector begins to show signs of recovery, new corporate lending opportunities are likely to surface.

“We think customers will want to take advantage of market conditions to take down some debt and finance new business,” said Tomalin, whose bank aims to increase its loan book to 170 billion dirhams by the end of 2012 from 162.8 billion in June.