Extracting value from the latest consumer boom is not as easy as it might seem at first glance
Thursday night - the beginning of the weekend - and thousands have flocked to Dubai's Mall of the Emirates, one of the largest shopping centres in the world, to shop, eat, watch a movie or a have a few runs down the indoor ski slope.
It's a similar story - minus the ski slope - at Dubai Mall, another of the emirate's 'mega-malls'. It attracted 54 million visitors in 2011, a 15 percent year-on-year growth; by contrast, New York City welcomed 50.5 million visitors last year.
"People are spending more than they were last year and there is more buoyancy and confidence in the market," said Vipen Sethi, chief executive of Landmark Group, a retail conglomerate with a presence in 17 countries across the Middle East, Africa and South Asia.
Traditionally, heightened consumer spending would be a boon for retail banks as it would create more demand for credit - whether it be personal or car loans or credit card spending.
But for retail bankers in the United Arab Emirates, of which Dubai is one of seven emirates, extracting value from the latest consumer boom is not as easy as it might seem at first glance.
Lessons from past excesses has made both borrowers and the country's regulator - the UAE central bank - more cautious towards debt, meaning that while lending is growing, the growth is moderate and banks are earning less from what they do lend.
Heightened competition is also impacting, further eroding bank income.
However, the buoyancy being created by the levels of consumer spending mean banks can still expect to see moderate growth this year from their retail operations.
"While I can't say specific numbers, the bottom line has been extremely positive in the first few months of the year," said Arup Mukhopadhyay, head of consumer banking at Abu Dhabi Commercial Bank, the UAE's third largest bank by market capitalisation.
The maturing customer
Shopping has always been at the heart of life for Dubai's expatriate community, given the heady cocktail of tax-free salaries, the presence of a large number of outlets to spend that cash and the fact it's too hot to do anything outside for at least three months of the year.
The number of shoppers has also been swelled in the last 18 months by tourists flocking to the emirate, a perceived safe-haven in a region rocked by the events of the Arab Spring.
Therefore, it is no surprise that the retail sector in the UAE is booming.
"From the aggregate average of feedback from clients in the sector, I would say most retailers are growing at a rate of at least 15 percent," Nick Levitt, head of commercial banking UAE at HSBC, said.
This is reflected in boosted credit card spending, with the average amount spent per transaction up 15-20 percent year-on-year in the first quarter, according to Farhad Irani, head of retail banking at Mashreq - the figure is as much as 25-30 percent higher for foreign cardholders, he added.
And this isn't from a low base either.
"The spends here are much higher than the averages worldwide, with the average about 500 dirhams ($140) per ticket. In Asia, the average ticket is $22-23," Irani said.
But while spending is rocketing, bankers say consumers have learnt from the excesses of the pre-crisis years, when expats would be forced to skip the country for fear of being arrested and jailed for defaulting on credit cards - at the height of the crisis in 2009, up to 2,500 customers per bank per month, a senior official at RAKBank told Reuters at the time.
"On this side of the 2009 crisis, customers have become more cautious so there is definitely a tendency to deleverage themselves," said ADCB's Mukhopadhyay, which in 2010 brought the UAE retail banking business of Royal Bank of Scotland.
This caution is not only reflected in how people manage their credit cards but also the levels of debt they take on in the form of personal loans, he added.
According to data from the UAE central bank, total personal lending in the country grew by just 0.7 percent year-on-year in March to 253.8 billion dirhams. The figure is also well down on the 909.4 billion dirhams lent out by UAE banks in September 2008 - at the height of the previous boom.
Another knock-on effect from the crisis is the subdued property markets in the UAE, with prices still yet to bottom out in Abu Dhabi.
Dubai has seen demand and prices pick up in some more fashionable areas but, according to one banker who didn't want to be named, much of the buying is being done by foreign investors - predominately from Russia and Arab Spring-affected countries - and settled fully in cash.
Therefore, mortgage demand in the UAE is still well down on the pre-crisis peak - 600-700 million dirhams per month now versus 1.4 billion dirhams in 2007, according to Irani at Mashreq, Dubai's second-largest lender by market value.
The long-term silver lining
Caution is also being exuded by the UAE central bank, who don't want a repeat of the delinquency rates on unsecured debt seen at the height of the troubles in 2009 and early 2010 - high-teens to early-twenties percent across the industry versus around half that level now, according to Irani.
Since the beginning of 2011, the regulator has brought in separate guidelines which control individual debt burden ratios, meaning monthly repayments on personal lending cannot exceed 50 percent of income, and cap bank charges, such as basic transaction activities on bank accounts.
"Both factors have reduced the retail banking revenue pool by around 10-15 percent - probably closer to 15 percent," Mukhopadhyay said.
Also undermining revenue is greater competition within the UAE retail banking sector, with many banks investing to improve and expand their operations and competing to gain market share from others.
Despite the constraints on short-term revenue generation, the fact remains the retail banking industry remains on course for moderate growth going forward because of the strength of the consumer sector.
Plus, what the crisis has left is a new breed of customer; one who is still willing to spend but is more cautious about how they do it.
"During 2009, there was enormous uncertainty of people not sure whether they were going to be employed or have to go home tomorrow," said John Wartig, group director, finance, at Al-Futtaim Group, a conglomerate holding UAE franchises for brands including Toyota, Honda and Ikea .
"But as things have settled down and as Dubai has settled down, people are feeling far more secure and now they are starting to replace bigger items, whether it's automobiles or furniture."For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.