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UAE banks profit from Europeans’ retreat

UAE banks benefit from European retreat

The rise in lending by local banks suggests that so far at least, fears that a pullback by European banks would create a shortage of funding and hurt the UAE economy are overblown.

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August 21, 2012 10:55 by



Banks in the United Arab Emirates are filling the gap left by European institutions pulling back from the country’s loan market – a trend that benefits local lenders even as margins face pressure and regulation weighs on growth.

Lending in the UAE, the second biggest Arab economy, grew just 1.8 percent in June from the end of December, according to central bank data.

But most local banks reported loan growth that exceeded the market rate. Six of the eight largest local banks by stock market capitalisation did so, led by First Gulf Bank with a 6 percent rise and Mashreq, up 5.1 percent.

Even smaller local banks appear to be profiting from the pullback by European banks, which are becoming more conservative globally because of financial pressures at home.

“With the global crisis in the euro zone, some banks are focused on their home markets and we have been able to move under the radar and take market share,” Paul Trowbridge, chief executive of United Arab Bank, the 12th largest local bank, told a news conference in July.

International banks do not reveal how much they lend into the UAE and some non-European lenders, most notably Citi, HSBC and Standard Chartered, continue to play significant roles in the country’s loan market.

European banks have not completely withdrawn either, especially if they can lend in euros, as shown by BNP Paribas’ role in an $850 million facility for Abu Dhabi’s International Petroleum Investment Company.

“The attitude we’ve taken is, for the clients who we have strong, longstanding relationships with, we will continue to support them and that continues to be the case,” said a banker at one French lender, adding that targeting resources at certain borrowers was a fact of life for all banks in the current uncertain global environment.

However, the composition of bank groups on loans to UAE entities shows a trend of greater local participation.

Just two or three years ago, large deals such as July’s $1.75 billion loan for DubaiDuty Free would have been led by global names. But of the six banks at the top of that deal, four were local.

Local banks have also been at the forefront in refinancing bond maturities for UAE entities, in particular obligations that were early this year seen as potentially difficult, such as those for DIFC Investments and Jebel Ali Free Zone.

And on loans linked to projects, traditionally dominated by European names, it is local banks which are now stumping up cash. The 4 billion dirham ($1.1 billion) financing package for the construction of Abu Dhabi airport’s new terminal is backed by four UAE banks and one from Jordan.

FEARS

The rise in lending by local banks suggests that so far at least, fears that a pullback by European banks would create a shortage of funding and hurt the UAE economy are overblown.

According to a March report by Moody’s Investors Service, quoting Bank for International Settlements data, a funding gap could emerge because European bank lending extended to the UAE as of September 2011 was worth 25 percent of the country’s total 2011 GDP of $358 billion.

In addition to cutting back new lending commitments, European banks have been selling off parts of their regional loan books to raise money and reduce their risk-weighted assets.

So some of the local banks’ lending growth is due to purchases of loans in the secondary market rather than new facilities for local borrowers. However, a significant amount of the growth appears to be organic.



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2 Comments

  1. Tarek Aziz on August 22, 2012 1:04 pm

    The LIBOR scandal by a British Bank will certainly have repercussions in the global financial markets including in countries as the UAE. In addition, looking at the Eurozone, and the Greece’s exit from the Eurozone will see some heavy selling pressure and a run on bank deposits in such countries as Portugal, Spain. It may be noted that since the last one month the market confidence has turned negative due to slowing economies in Europe, the US and China giving rise to the possibility of yet another global recession amid large scale unemployment and high oil prices. This will have a direct impact on various Middle East oil economies (petro dollars). It is clear that both ECB and the US Federal Reserve have no intentions to pump in more liquidity into the financial system. This means all European banks will slowdown their business overseas and concentrate on their home country going forward.

     
  2. Mohammed on August 22, 2012 6:41 pm

    Agree with TA’s observation. UAE should take care of its economy and contain unnecessary spending.

     

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