UAE bank lending set for boost from retail, SMEs

Banks loosen credit lines in sign of recovery from defaults linked to Dubai real estate crash
UAE bank lending set for boost from retail, SMEs
Emirates NBD is Dubais largest bank by assets
By William Pesek
Tue 10 Jan 2012 07:00 PM

UAE bank lending, which expanded at the fastest pace in
three years in 2011, may grow at a similar pace this year as banks extend
credit to retail customers and small- and medium-sized companies.

Total lending of the 51 local and foreign lenders operating
in the second-largest Arab economy rose 4.2 percent to AED1.07 trillion ($291bn)
in the first 11 months of last year, central bank data show. After jumping more
than 30 percent a year between 2005 and 2008, credit growth at UAE banks dropped
to 1.3 percent in 2010.

Salary increases for federal government employees at the end
of 2011 could spur retail lending this year, while banks may focus on lending
to the “relatively underserved” small- and medium-enterprise segment, Shabbir
Malik, a bank analyst at investment bank EFG-Hermes Holding SAE, said. “We
expect about 5 percent loan growth for 2012.”

UAE banks are starting to recover from a Dubai real estate
crash that led to higher loan defaults and prompted lenders to rein in credit
growth. The economy grew about 4.5 percent last year after contracting in 2009.
Expansion may slow to around 3 percent in 2012 as oil-output growth slows and
public spending stagnates, according to Standard & Poor’s.

The average yield on bonds sold by financial services
companies in the six-nation Gulf Cooperation Council rose 131 basis points, or
1.3 percentage points, to 6.38 percent in 2011, according to the HSBC/NASDAQ
Dubai GCC Conventional Finance Services Bond Index. The yield on Dubai
government’s 6.7 percent bond due October 2015 rose 5 basis points to 5.74
percent on Monday, according to data compiled by Bloomberg.

UAE bank lending may grow this year in the “low single
digits, similar to 2011,” Timucin Engin, a Dubai-based associate director at
Standard & Poor’s, said by telephone. “Whatever lending growth there will
be, will be generated predominantly by the Abu Dhabi-based banks.”

The UAE’s capital is investing in energy projects,
infrastructure and housing to diversify its economy. Dubai scaled back its 2012
development budget to 41 percent of the 2008 level as it seeks to cut its
deficit in half.

National Bank of Abu Dhabi, the emirate’s biggest bank by
assets, reported a 13.6 percent increase in lending in the nine months of 2011
and First Gulf Bank of Abu Dhabi posted a 7 percent increase.

By contrast, Dubai-based Emirates NBD said loans didn’t
increase over that period, while credit fell 9.1 percent at Mashreqbank,
another Dubai-based lender.

Emirates NBD Chief Executive Officer Rick Pudner said Nov 28
he expected credit to expand by 3 percent to 4 percent in 2012.

“The pick up in loan growth is modest, and I don’t sense
that it’s gaining much momentum,” Simon Williams, the Middle East chief
economist at HSBC Holdings, said in an email.

“I expect aggregate credit growth, particularly to the
private sector, to be pretty muted in 2012, too.”

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The economy of Dubai, the second largest of the seven
emirates that make up the UAE, saw home prices drop by more than half as global
credit markets seized up. Some Dubai-owned companies were forced to delay loan
repayments with Dubai World reaching a deal in March to restructure $25bn.

A decline in bank deposits since July may hurt bank lending
in the country. After a surge in the first half of 2011 when depositors sought
shelter in the UAE from the political turmoil that roiled the region, savings
are falling as the capital flight to the country reverses.

Several Abu Dhabi-based banks have raised money last year to
help extend loan maturities and fund growth.

Abu Dhabi Commercial Bank PJSC, the UAE’s third-largest
lender by assets, sold $500m of five-year dollar- denominated sukuk in
November, while Abu Dhabi Islamic Bank, the country’s second-biggest Sharia-compliant
bank, also issued $500m of Islamic bonds in November. First Gulf Bank raised
$650m from a sukuk sale in July.

Emirates Islamic Bank, a unit of Emirates NBD, is meeting
fixed-income investors and may sell five-year Islamic bonds this week, according
to bankers familiar with the deal.

“Funding will be a challenge” at UAE banks in 2012 with
their loans-to-deposit ratio “stretched,” Engin at Standard & Poor’s said.
“The international markets might not be as accommodative in 2012 in terms of
providing funding.”

In a possible trigger for retail lending, UAE President
Sheikh Khalifa bin Zayed Al Nahyan ordered increases to basic pay of between 35
percent and 100 percent for all federal government employees who are citizens
of the country, state-run WAM news agency said Nov 30.

The president also called for a AED10bn fund to be
established to help nationals meet loan obligations.

GCC banks also aim to boost lending to small- and medium-
sized enterprises, or SMEs, and focus on youth and women to help increase
returns, according to an Accenture survey released in November. Loans to SMEs
make up 2 percent of total lending in the GCC, well below the 27 percent
average of countries in the Organization of Economic Cooperation and Development,
Amr El Saadani, managing director for Accenture’s financial services practice,
said in a Nov 29 interview.

“In terms of loan growth, we think First Gulf Bank, NBAD are
likely to grow faster than the rest of the sector,” EFG- Hermes’ Malik said.
“We expect the government of Abu Dhabi to spend on infrastructure projects,
mainly related to the well- being of citizens of the UAE, so these projects
will create some demand for credit that is going to benefit UAE banks.”

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