UAE banks turn to SME lending as interest rates drop

UAE banks to focus on individual and SME loans in the short term but growth beyond borders is key for future success, analysts say.

Emirates NBD said its net income doubled to Dh1.56 billion in the three months ending September 30 compared to the same period the previous year. Jeffrey E Biteng / The National

With interest rates at record lows, UAE banks are likely to focus on selling loans to individuals and owners of small businesses in the near term because the profit margins are higher than loans made to less risky corporate clients.

But to stay competitive in the long run, they will need to become more creative in finding ways to get more revenue from services such as trade finance and asset management as well as expanding beyond the borders of the UAE, analysts say.

Banks including Emirates NBD, Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) revealed in their third-quarter earnings last week that a big driver of their profits was from handing out loans to individuals, known as retail customers, and SME customers. Other forms of income apart from interest, including from brokerage and arranging trade finance, also helped to buoy earnings.

Emirates NBD said its recently acquired business in Egypt helped to boost its bottom line, while the chief executive of DIB emphasised the bank’s plans for global expansion.

“What’s important going forward is geographical spread,” said Sanyalaksna Manibhandu, a senior analyst at National Bank of Abu Dhabi.

“Emirates NBD is in Egypt, that’s giving them some expansion benefits. DIB spoke about where they are going in the far east and Africa and that is important. NBAD has been going abroad for a while. Given that there are over 50 banks in total operating in the UAE, I think banks that do not want to go and expand abroad have got more of a question mark over them than those that are expanding.

"In the short term, banks will have to focus on the SME and retail sector. For international expansion, it's a more medium-term roll out."

The banks have ridden an economic revival in the UAE that picked up speed last year when growth exceeded 4 per cent after the years of languor that followed Dubai’s 2009 debt crisis.

At the same time, competition for retail customers has become especially fierce in a country where more than 50 banks serve nine million people, especially as interest rates keep inching lower, putting pressure on the amount banks can make from loans in the UAE.

Lenders have also ramped up their search for SMEs to give loans to, especially as policymakers call for more lending to these businesses, as well as finding ways to grow their business globally. NBAD, FGB and Emirates NBD, ADCB, DIB and Abu Dhabi Islamic are among the biggest banks buying, starting or beefing up businesses abroad, mostly in emerging markets such as Egypt, Kenya and Indonesia.

“Despite a competitive environment, we have been able to widen margins helped by growth in higher margin retail and Islamic products, a more efficient funding and capital base and contribution from our Egyptian business,” said Surya Subramanian, Emirates NBD’s chief operating officer.

Emirates NBD said its net income doubled to Dh1.56 billion in the three months ending September 30 compared to the same period the previous year. Loans advanced 6 per cent to Dh247.7bn and the bank said that its non-interest income gained 39 per cent, bolstered by increases in profit from trade finance, foreign exchange, brokerage and asset management.

DIB, which has businesses in Pakistan and Jordan, said its third-quarter profit gained 55.7 per cent to Dh676.8 million from the same period last year. It is in the process of expanding farther afield into countries including Kenya and Indonesia, where there is demand for its services.

“Global economic growth and development has seen a major shift over the last decade with Asia and in particular Middle East, South Asia and Far East being among the major drivers,” said Adnan Chilwan, DIB’s chief executive.

The chief executive of the National Bank of Ras Al Khaimah, which is seeking to acquire a majority stake in Ras Al Khaimah National Insurance Company, said that the bank was focusing more on selling fee-based products and services.

“Looking ahead, we see more potential for growth by diversifying into fee-generating products and growing our commercial lending and treasury segments,” said Peter England. “We also see a tremendous opportunity for growth by expanding into complementary industries.”

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