The UAE retail banking industry experienced a major boom between 2002-07 as the country experienced rapid population growth.    

Key fact

Credit card issuance in the UAE rose threefold between 2003-08

Source: MEED

The influx of expatriate workers meant local banks had a constant pool of new customers to grow their business.

The resulting sharp rise in consumer credit is illustrated by the fact the penetration rate per 100 adults was 90.8 per cent in 2008, up from 28.4 per cent only five years earlier.

Total ATMs in the UAE
2005 1,576
2006 1,690
2007 2,057
2008 2,453
2009 3,599
2010* 3,354
*At March 2010
ATMs = Automated Teller Machines 
Source: Central Bank

Credit card issuance in the UAE rose threefold from 62 cards to 199.4 cards for every 100 adults between 2003-08.

Redundancies in the UAE

However, the influx of new customers came to a halt when the global financial crisis hit in the final quarter of 2008. It also lead to widespread job losses in the UAE.

The country’s law stipulates expatriates must return to their home country if they do not find new employment within a month. This resulted in a large exodus of workers – many of whom left behind sizeable debts.

UAE debit and credit card issuance (millions)
2005 2,494,746
2006 3,078,360
2007 4,206,458
2008 8,817,665
2009 8,449,770
Source: Central Bank

Redundancies were concentrated in the real-estate sector, as well as the construction and hospitality sectors.

In addition to job losses, salary cuts were forced onto many employees as businesses looked to reduce overheads.

Banks responded to the crisis by exercising caution in lending to customers employed in sectors most affected by job cuts.

Lenders also raised the minimum salary threshold to access credit. Consumer spending fell as a result.

“Essentially, any retail business depends on salaried business. So it is no surprise that our growth has suffered over the past couple of years,” says Arup Mukhopadhyay, head of consumer banking at Abu Dhabi Commercial Bank (ADCB).

“It’s only natural that given the economic scenario, we have been cautious about lending to certain sectors and strengthened our income criteria to access loans.” 

The slowdown in retail banking and increase in defaults impacted profitability of UAE banks. ADCB reported a net loss of AED513m ($139.7m) for 2009.

Mashreqbank, Dubai’s second-largest lender by market value, posted a 48 per cent fall in first-quarter profit this year to AED251m, owing to lower customer deposits and higher provisioning.   

Customer deposits at Mashreqbank declined to AED47.4bn, a 12 per cent fall compared with the previous quarter. The bank set aside AED484m in provisions for impairments during the first three months of the year.

The UAE banking sector was also heavily exposed to state-owned conglomerate Dubai World’s $23.5bn debt restructuring. Estimates of potential exposure range up to $15bn, with Dubai banks particularly exposed. 

In March, international ratings agency Fitch Ratings downgraded Mashreqbank, citing the lender’s deteriorating asset quality, as well as defaults in the UAE retail banking sector.

“We are looking for business, but we are more selective in our underwriting than we would have been two years ago,” says Douglas Beckett, head of retail banking at Mashreqbank.

“And that’s the same for banks across the entire industry. That’s often portrayed as not lending, but we all are, it’s just on a more targeted basis.”

Beckett says the bank’s focus has now  shifted from customer acquisition to retention, with a greater emphasis on building customer relationships that are both broader and deeper. “Growth strategies are having to be revisited,” he says.

“Typically, customers with higher salaries have a broader range of needs so a range of products can be sold. This means the potential revenues that can be generated are much higher.”       

Customer focus

After years of being able to pick and choose their strategy, banks have realised that in the new business environment, the customer now defines the product.

In mid-July, the UK’s Standard Chartered Bank announced it was launching a new mortgage facility, which offers non-UAE residents a customised approach to access loans of up to $5m. “We have shifted from a product focus to being more customer-focused,” says David Inglesfield, regional head of private banking at Standard Chartered.

“We have been developing better service and product packages based around our customers’ needs rather than adopting a one-size fits all approach.”

Another noticeable trend in the market is that lenders have increased their margins on credit cards to try and compensate for losses on other types of loans. At present the interest rates on credit cards offered by local banks are among the highest in the world.

Average annual interest rates on UAE cards have increased by two percentage points from June 2009 to stand at 33.9 per cent at the end of June this year, more than double the average rate in the US.

Abu Dhabi-based First Gulf Bank and Mashreqbank offer platinum cards with annual interest rates above 40 per cent. This is well above the banks’ funding costs and represents a healthy profit.

“Interest rates have increased on credit cards as banks look to preserve profit margins because delinquencies have increased across the board on other retail products,” says Beckett.

“So there have been attempts to re-price retail credit generally, not just on credit cards.”

With question marks over the health of UAE property firms, and the potential for a fresh wave of redundancies, there is concern over the future of more non-performing loans (NPLs).

In June, Dubai Holding Commercial Operations Group (DHCOG), a unit of state-owned Dubai Holding, announced it may sell off assets after posting a $6.2bn loss in 2009. DHCOG had invested heavily in the local real-estate market.

Dubai’s property crash has wiped more than 50 per cent off property values since the market peaked in the final quarter of 2008, while neighbouring Abu Dhabi’s market has dropped by 30 per cent. Further falls are expected as new stock enters the market.

During the real-estate boom of 2002-08, personal loans were often recycled into the property sector, and to a large extent, fuelled speculative buying in the market. It is likely that some of these personal loans could become NPLs in the months ahead.

“One key area of concern for us is oversupply of the residential market, which could lead to more loan defaults,” says Beckett.

Positive outlook

Despite the concerns relating to the property market, industry insiders are mostly upbeat in their outlook for the retail banking sector.

“We believe the worst is behind us, that the market has stabilised and that we are on the path to recovery,” says Mukhopadhyay.

“In terms of our own loan portfolio, we were worst affected by defaults in the first quarter of 2009. These peaked in the second and third quarters of 2009 and subsequently, the trend has been moving in the opposite direction.”

Mashreqbank’s Beckett agrees: “Retail is typically impacted first and then the corporate sector is usually hit at a slightly later stage in the cycle. This means that the challenges in the retail space have largely stabilised now and there are faster opportunities for recovery here than in the corporate sector.” 

Financial results from the banks show that retail defaults have slowed as job losses eased across most sectors. Meanwhile, although corporate lending has been re-priced, retail lending margins remain much more attractive. Consequently, banks are expecting their retail operations to be more lucrative this year.

National Bank of Abu Dhabi (NBAD), the region’s third largest bank by asset size, expects to see a surge in its retail operations. 

“Consumer lending has increased by 15-20 per cent this year and that will contribute to growth in our retail business,” says Saif al-Shehhi, senior general manager of domestic banking at NBAD. “We will see retail’s share [of revenues] go up by 5-10 per cent this year.” Currently, retail banking accounts for about 20 per cent of the bank’s total revenues.

In what many consider to be a bold move in the current economic climate, ADCB acquired the UAE retail arm of the UK’s Royal Bank of Scotland in June for $100m. The deal is subject to approval from the Central Bank of the UAE.

The acquisition will expand ADCB’s domestic footprint – increasing its retail customer base by 250,000 and doubling its share in the UAE credit card market to 15 per cent, making it the UAE’s third largest credit card provider.

ADCB’s credit card portfolio currently stands at AED1.4bn, comprising only 1.2 per cent of gross loans. Even with the acquisition, it will remain a small part of its business.

Yet the acquisition could prove a lucrative investment for ADCB given that credit cards offer some of the highest profit margins in the retail banking industry – on average double-digits. At the time of announcing the takeover, ADCB said the business was a “very good strategic fit” because it would add to the bank’s two areas of focus for growth – its credit card and wealth management businesses.

ADCB is targeting a 15 per cent risk adjusted yield – a way for measuring returns that takes into account how risky they are – for its credit card portfolio this year. 

However, Mashreqbank’s Beckett believes there are limited opportunities for credit card growth in the current climate. 

“The population has stopped growing,” he says. “And customers within the existing population are now managing their finances more carefully than before. They don’t want to be responsible for three or four cards anymore.”   

Mashreqbank is now targeting wealth management, affluent banking and cross-selling of products to grow its business.

Profit pressure

Despite the brighter optimism surrounding the retail segment, bank profits will remain under pressure, analysts say.

New loan impairment losses that banks may incur from any further deteriorating in the property market will determine profitability in 2010. “We are particularly concerned about mortgage books,” says Robert Thursfield, director of Fitch Ratings financial institutions team in Dubai.

“These are not showing signs of stress as yet. We believe defaults could rise with higher supply and sharply lower rents, plus the effect of lower arrivals and high service charges.” 

In a research note published on 18 July, Fitch says it expects Dubai’s real-estate market continue weakening, with increasing customer delinquencies and limited liquidity. On top of this, the growth of Abu Dhabi’s retail banking sector is expected to outpace Dubai’s, due to the fact that it has stronger underlying economic fundamentals, which should help draw in a larger workforce.  

“I expect Dubai-based banks will be looking to the Abu Dhabi market in the future, we certainly are,” says Beckett.

“The world has changed, and the banking industry is adapting to that change by reviewing business models and establishing new priorities.”