Banks ramp up lending to push profits, as Gulf state recovers from credit crisis
After racking up losses from real estate and investment
loans, banks in the UAE are increasing lending to small and medium-sized
companies to boost profit as the economy recovers from the credit crisis.
Abu Dhabi Commercial Bank, the country’s third-biggest bank
by assets, boosted loans by 25 percent to small- and medium-sized enterprises,
or SMEs, in the past 12 months, said Colin Fraser, the company’s Abu
Dhabi-based head of wholesale banking. HSBC Holdings UAE unit aims to generate
40 percent of its commercial banking revenue from SMEs, in coming years, up
from 25 percent today, said Nick Levitt, HSBC’s head of UAE commercial banking.
Lenders are trying to tap a wider range of borrowers after
real-estate prices plunged more than 60 percent in the past three years. The
slump triggered a doubling in bad loans and forced corporations to restructure
debt. Smaller companies are now seeking funds to expand as growth in the region
accelerates. Dubai bank stocks climbed 2.5 percent this year, bucking the 11
percent decline in the Dubai Financial Market General Index.
Smaller firms “weathered the downturn” as they “are well-run
businesses, they are conservative and generally owner- managed,” Fraser said in
an August 16 email. Many SMEs “are looking to invest into the upturn,” he said.
The International Monetary Fund predicts gross domestic
product will accelerate to 3.3 percent in 2011 after expanding 1.4 percent last
year. Bank lending in the UAE expanded 2.4 percent in the first half of the
year after a 1.3 percent gain in 2010, data from the central bank show.
The cost of protecting Dubai’s debt against default for five
years tumbled 238 basis points since reaching a high in February 2010, three
months after the state-owned holding company Dubai World asked lenders for a
Dubai’s government defines SMEs as companies with as many as
250 employees and sales of as much as AED250m ($68m). SMEs make up 95 percent
of all Dubai companies, employ 42 percent of the workforce and contribute 40
percent to the emirate’s GDP, according to data released in March.
Banks are trying to reverse losses they incurred as they
financed Dubai’s property bubble. Lending jumped by more than 30 percent
annually in the four years to 2008, according to central bank data. Specific
provisions for bad loans at UAE banks rose 28 percent in June from a year ago
to AED47.3bn, the central bank said.
Banks set aside about $500m to cover losses from Dubai
World’s restructured loans, the IMF said in May. Bad loans at UAE banks rose to
8.3 percent of all loans in 2010 from 4.9 percent in 2009, New York-based
Moody’s Investors Service estimated last month.
Nakheel, the Dubai-owned property company building
palm-shaped islands off the emirate’s coast, is seeking to alter the terms on
at least $7.4bn of bank and trade creditors’ debt.
Article continues on next page…
Dubai World, one of the emirate’s three main state-owned
holding companies, reached an agreement in March with about 80 creditors to
delay payments on about $14.7bn of loans.
The banks’ non-performing loans are the result of a
“concentration” of lending to a small number of customers, HSBC’s Levitt said.
“The natural thing to diversify revenue and risk profile is to look to try and
broaden the customer base.”
Banks can charge smaller borrowers higher rates, John
Tofarides, a Dubai-based analyst at Moody’s, said in an August 23 email.
“Lending to SMEs however, could be viewed as riskier due to
the inferior transparency and visibility of accounts, compared with larger
corporations, which have external auditors and certain governance structures in
place,” Tofarides said.
Companies mandated $13.8bn through syndicated loans this
year in the Middle East and North Africa, according to data compiled by Bloomberg.
That compares with $40.2bn in the year-earlier period.
London-based HSBC is expanding its seven-year old SME
operation in the Emirate. In April, it doubled the size of a $100m fund set up
in 2010 to provide loans to local businesses.
“We decided to
accelerate its development coming out of the global financial crisis,” Levitt
said. The expanded fund “has already been fully allocated,” he said.
Abu Dhabi Commercial Bank, which defines SMEs as those with
revenue of less than 100 million dirhams, more than doubled the number of
bankers targeting the companies as clients in the past three years to about
150, Fraser said.
The bank tripled its number of smaller customers to more
than 30,000 as it provided loans to purchase shops and offices, as well as
medical and construction equipment, he said.
Emirates NBD, the country’s biggest bank by assets, posted an
87 percent rise in second-quarter profit to AED744.5m. National Bank of Abu
Dhabi, the region’s second-biggest lender, reported a 2.5 percent increase to AED1.03bn.
ADCB reported a AED1.34bn profit compared with a loss in the