The outlook for loan growth in the UAE has softened for the second straight quarter amid a sharp drop in the price of oil, according to a UAE Central Bank credit sentiment survey.
Government-related entities, or GREs, led the decline in confidence over growth for credit as banks become more particular about who they lend to.
“Overall credit conditions appear to have softened from previous quarters, with moderating demand growth for credit and a tightening of credit standards for corporates,” the Central Bank said.
“By market segment, demand growth slowed across all categories except Islamic products during the March quarter. Notably demand growth was weakest within the GRE sector during the quarter.”
The Central Bank said that the weighted percentage of respondents reporting an increase in demand for business loans minus those reporting a drop in demand fell to 13.6 in the first quarter from 29.6 in the fourth quarter of 2014. This is the second report of its kind the Central Bank has published, the first of which was during the fourth quarter of last year.
In its first quarter review, almost 42 per cent of respondents reported a negative impact on demand for business loans owing to the drop in the price of oil, while 44.9 per cent reported no impact and 13.6 per cent reported a positive impact.
Crude oil, upon which the federal government relies to fund more than 60 per cent of its budget, lost half its value last year and shed 10 per cent in the first three months of the year. The UAE is the world's eighth largest oil producer.
“The banks are becoming cautious about who they are lending to in the corporate sector, trying to make sure that the loans they are giving out will be to quality businesses,” said Shabbir Malik, a Dubai-based bank analyst at the Egyptian investment bank EFG-Hermes. “They are doing more due diligence and holding back if the rates on the loans are not favourable. It means there’s a reduced appetite for risk. From the bank’s perspective, the drop in oil is making them think about who to lend to.”
Even though bank confidence about the demand for loans is ebbing, profits remain high. Most big UAE banks reported a buoyant first quarter, but a lot of that growth was fuelled by income from services apart from loans, such as fees on credit cards, remittances and asset management.
Emirates NBD, which took the lead as the UAE's most profitable bank in the first quarter, said fees from credit cards and its money transfer business helped to boost its profit in the first three months of the year by 60 per cent from the same period last year. The bank's Sharia-compliant subsidiary, Emirates Islamic, also helped to boost the group's profitability.
Still, the bank’s chief executive expressed a note of caution in connection with the price of oil.
“We remain cautiously optimistic for the remainder of 2015 but are conscious of the headwinds that a strong dollar and low oil price can present,” Shayne Nelson said last week.
UAE banks registered record profits in the past couple of years as the economy recovered from the financial crisis of 2008. But banks are focusing more on making money from higher-yielding individual customers and small and medium-sized enterprises in the aftermath of the oil price slump.
That is because government corporations sensitive to oil price fluctuations may not have a big appetite for tapping debt. Lenders are also beefing up their fee-generating businesses such as trade finance, wealth management and securities brokerage.
Last year, the economy is estimated to have grown more than 4 per cent, even after the price of oil fell more than 50 per cent during the second half. As a result of the drop, many economists, including those at HSBC and Standard Chartered and the IMF have lowered their growth forecasts for Arabian Gulf countries this year.
mkassem@thenational.ae
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