National Bank of Abu Dhabi said loan costs in the UAE, which have been falling for at least a year, may be set for further declines as banks compete for deals amid an increase in customer deposits.
Banks are cutting prices to retain clients and seeking to compensate by generating more fees from businesses such as derivatives and foreign exchange, Jonathan Macdonald, head of syndicated finance at the UAE’s biggest lender, said in an interview. Loan rates for local borrowers are also higher than for similarly-rated European companies, he said.
“It’s absolutely a borrowers market,” said Mr Macdonald, who joined in June from Barclays in London, where he was head of loan syndication for Europe and Asia Pacific. “There’s a significant excess of liquidity struggling to find a home.”
Companies in the UAE are re-pricing loans signed as recently as within the last year to take advantage of banks’ surplus cash. Dubai Duty Free, the world’s biggest airport retailer, is cutting the price of a $1.75 billion syndicated loan by up to 75 basis points, it said. State-run holding company Investment Corporation of Dubai is seeking to refinance a $880 million loan for its Atlantis, The Palm unit, four people with knowledge of the matter said this month.
The combined loans-to-deposit ratio of the UAE’s 51 banks, a measure of liquidity, was 96 per cent at the end of May compared with 98 per cent a year earlier, data compiled by Bloomberg shows. Banks surplus cash helped push the three-month Emirates interbank offered rate, a benchmark used by banks to price some loans, to 0.71 percent yesterday, near the lowest since at least 2006 when Bloomberg began collecting the data.
“The supply demand imbalance which is driving lower pricing can’t last forever,” Mr Macdonald said from the bank’s headquarters in Abu Dhabi. “Our advice to clients is to take advantage of these favourable market dynamics while they last.”
UAE bank lending rose 4 per cent in the five months through May, slowing from a 7.7 per cent gain last year, according to central bank data, while customer deposits rose almost 11 per cent in the year through May. Mohsin Ali Nathani, Standard Chartered’s local chief executive, said that he expects lending to rise 5 per cent to 6 per cent this year.
“Until you see a meaningful recovery in corporate credit growth, you will see this kind of pressure” to cut loan rates, Shabbir Malik, an analyst at brokerage EFG-Hermes Holding, said by phone from Dubai yesterday. “While the policies of the US Federal Reserve and central banks of the developed markets continue to be accommodative, I don’t see liquidity drying up.”
Other UAE borrowers seeking to reduce loan prices include Jebel Ali Free Zone, a business park operator in Dubai, which is cutting the rate on a Dh2.2 billion Islamic loan by half to 1.5 percentage points over Eibor, two bankers familiar with the deal said this month.
Emirates Central Cooling Systems, a Dubai-based utility, is seeking to cut the price on a $600 million syndicated loan by 0.3 percentage points from the 2.05 percent margin it pays now, two people with knowledge of the matter said last week.
Still, the increased competition isn’t hurting banks’ earnings. NBAD said last month that net income will probably rise 8 per cent to 10 per cent this year, up from an earlier forecast of 6 per cent to 8 per cent. Emirates NBD, theUAE’s second-biggest bank by assets, reported a better-than- expected 35 per cent rise in second-quarter profit.
The price declines are unlikely to endure because of the impact on banks’ returns, Standard Chartered’s Mr Nathani said.
“The margin compression doesn’t last too long,” he said in Dubai. “Whilst the banking sector is very liquid, the return on capital would become an issue for everyone.”
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