Banks in the UAE 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 European banks have not completely withdrawn either, especially if they can lend in euros, as shown by BNP Paribas' role in an US$850m facility for Abu Dhabi's International Petroleum Investment Company.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 US$1.75bn loan for Dubai Duty 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 AED4bn (US$1.1bn) financing package for the construction of Abu Dhabi airport's new terminal is backed by four UAE banks and one from Jordan. 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 US$358bn. 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. "We're not going to meet targets by going out and buying loans from retreating banks because there is no relationship traction to that," Michael Tomalin, chief executive of National Bank of Abu Dhabi, which posted loan growth of 2.1 percent in the first half, told a July analysts call. Investors have responded positively to local banks' performance. FGB's share price was up 17.5 percent in the month to August 15, with Union National Bank gaining 14.8 percent and Emirates NBD up 14.1 percent. All indicators of the health of the local banking sector have improved, said Julian Bruce, director of institutional equity sales at EFG-Hermes. "There's an increase in both loans and deposits, spreads are okay and there is a slight slow-down in provisions, with non-performing loan ratios also looking healthier," he said. Loan loss provisioning has been the bane of the UAE banking system since Dubai World asked to restructure US$25bn of debt in November 2009. Some banks remain constrained by fresh impairments - most notably ENBD, which has posted a fourth straight drop in quarterly profit because of provisions linked to state-linked entities. For Abu Dhabi-based banks, though, the picture is improving; UNB's quarterly provisions were down 20.5 percent year-on-year. Future lending growth is likely to remain moderate, however, both because lessons have been learned from past mistakes and since loan-to-deposit ratios in the UAE are already high - for many banks, over 100 percent. This will make banks picky over borrowers, said one Gulf-based banking analyst. Since the start of July, UAE interbank lending rates have sunk to their lowest levels since 2004 on the back of loose liquidity in the local and global economies. While this trend could cut banks' profit margins on corporate lending, lower borrowing rates are also likely to encourage more companies to raise new loans. Increased demand will be welcomed because new regulation has placed a number of curbs on lending by UAE banks, especially to retail borrowers. "The continuation of the uncertainty prevailing in the euro zone, when combined with the increasingly enhanced regulatory regime in the UAE, means we continue to anticipate limited quality credit opportunities and a resultant subdued growth in profits for the balance of 2012," Tirad Mahmoud, CEO of Abu Dhabi Islamic Bank, said last month. Domestic banking rules announced this year include caps on lending to sovereign and government-related entities, a requirement to hold liquid assets worth 10 percent of liabilities and further debt forgiveness for UAE citizens. The impact of heightened regulation is already being felt, with UNB citing lending restrictions to individuals brought in last year for a 14 percent drop in fee and commission income in the second quarter compared with the same period last year. But with sentiment in the UAE economy improving, especially as the real estate sector begins to show signs of recovery, new corporate lending opportunities are likely to surface. "We think customers will want to take advantage of market conditions to take down some debt and finance new business," said Tomalin, whose bank aims to increase its loan book to AED170bn by the end of 2012 from AED162.8bn in June. Arabianbusiness
