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CASHING IN? Retail boom not a bonanza for UAE banks
For retail bankers in the UAE, extracting value from the latest consumer boom is not as easy as it might seem at first glance; after all lessons from past excesses has made both borrowers and the central bank - more cautious towards debt.
June 15, 2012 6:01 by Reuters
But while spending is rocketing, bankers say consumers have learnt from the excesses of the pre-crisis years, when expats would be forced to skip the country for fear of being arrested and jailed for defaulting on credit cards – at the height of the crisis in 2009, up to 2,500 customers per bank per month, a senior official at RAKBank told Reuters at the time.
“On this side of the 2009 crisis, customers have become more cautious so there is definitely a tendency to deleverage themselves,” said ADCB’s Mukhopadhyay, which in 2010 brought the UAE retail banking business of Royal Bank of Scotland.
This caution is not only reflected in how people manage their credit cards but also the levels of debt they take on in the form of personal loans, he added.
According to data from the UAE central bank, total personal lending in the country grew by just 0.7 percent year-on-year in March to 253.8 billion dirhams. The figure is also well down on the 909.4 billion dirhams lent out by UAE banks in September 2008 – at the height of the previous boom.
Another knock-on effect from the crisis is the subdued property markets in the UAE, with prices still yet to bottom out in Abu Dhabi.
Dubai has seen demand and prices pick up in some more fashionable areas but, according to one banker who didn’t want to be named, much of the buying is being done by foreign investors – predominately from Russia and Arab Spring-affected countries – and settled fully in cash.
Therefore, mortgage demand in the UAE is still well down on the pre-crisis peak – 600-700 million dirhams per month now versus 1.4 billion dirhams in 2007, according to Irani at Mashreq, Dubai’s second-largest lender by market value.
THE LONG-TERM SILVER LINING
Caution is also being exuded by the UAE central bank, who don’t want a repeat of the delinquency rates on unsecured debt seen at the height of the troubles in 2009 and early 2010 – high-teens to early-twenties percent across the industry versus around half that level now, according to Irani.
Since the beginning of 2011, the regulator has brought in separate guidelines which control individual debt burden ratios, meaning monthly repayments on personal lending cannot exceed 50 percent of income, and cap bank charges, such as basic transaction activities on bank accounts.
“Both factors have reduced the retail banking revenue pool by around 10-15 percent – probably closer to 15 percent,” Mukhopadhyay said.
Also undermining revenue is greater competition within the UAE retail banking sector, with many banks investing to improve and expand their operations and competing to gain market share from others.
Despite the constraints on short-term revenue generation, the fact remains the retail banking industry remains on course for moderate growth going forward because of the strength of the consumer sector.
Plus, what the crisis has left is a new breed of customer; one who is still willing to spend but is more cautious about how they do it.
“During 2009, there was enormous uncertainty of people not sure whether they were going to be employed or have to go home tomorrow,” said John Wartig, group director, finance, at Al-Futtaim Group, a conglomerate holding UAE franchises for brands including Toyota, Honda and Ikea .
“But as things have settled down and as Dubai has settled down, people are feeling far more secure and now they are starting to replace bigger items, whether it’s automobiles or furniture.”