The collapse in the price of oil, the engine of economic growth in the Arabian Gulf, will slow the deposits that the UAE’s biggest banks get from government companies and sovereign wealth funds.
The biggest banks’ chief executives argue, however, that they will be compensated by international expansion and their focus on high-returning loans to individuals as they deal less with the kind of big government corporations and sovereign wealth funds that may be affected by the drop in oil.
The UAE is one of the world’s largest producers of crude, a commodity that has lost more than half of its value since last year, and the government relies on revenue from it to fund about 60 per cent of its federal budget.
“Let’s all be grown up. There will be some effect in the way businesses transact within the Gulf while oil prices remain at the theses levels,” said Alex Thursby, the chief executive of National Bank of Abu Dhabi, the biggest bank by assets in the UAE.
“We are moving our balance sheet increasingly towards retail, commercial and the wealth side of the business, and that is simply because we get better returns and better margins,” he said last week. “But our loan growth on the wholesale side, particularly relationship loans, has actually decreased.
Banks in the UAE, of which there are more than 50, have been spreading their wings internationally over the past couple of years as the local scene gets crowded and margins compress amid record-low interest rates. NBAD said in 2013 that it was planning to build eight hubs in a West-East geographical corridor of emerging markets to tap intercontinental trade flows valued at US$137 billion. Meanwhile, Emirates NBD, Dubai’s biggest bank by assets, has expanded into Egypt, a country where one in 10 of the nation’s population do not have bank accounts. And FGB, NBAD’s main Abu Dhabi rival, has opened offices in Singapore and South Korea in recent years to expand its reach.
To hedge against the potential economic slowdown that may arise from lower oil prices, the big banks have been trying to add more customers not directly linked to the government and focus on activities other than loans such as asset management, trade finance and brokerage services to lessen reliance on government deposits.
In that regard, NBAD’s non-interest income, the money it gets from activities apart from loans, jumped 17.6 per cent last year to Dh3.39bn from Dh2.88bn as the bank increased its efforts in growing businesses such as trade finance, wealth management and brokerage services. Its loan-to-deposit ratio for its international business in the past year has decreased to 80 per cent from 110 per cent.
That is in part because while the UAE relies heavily on oil, countries such as Egypt are net energy importers, and NBAD’s business in emerging markets that will get a boost from cheaper oil is filling the bank’s coffers. About 10 of the bank’s top depositors come from outside of the UAE, Mr Thursby said.
The price of crude has dropped 60 per cent since last June because of increasing energy production from North America and waning demand from emerging markets such as China. The price of crude tumbled 30 per cent in the last three months of last year, rumbling the equity and real estate markets. Dubai’s benchmark stock index pared its gains last year to 12 per cent after the slide and has dropped 2.6 per cent this year while real estate prices have softened.
Last month the real estate agency JLL reported that average villa prices in Dubai had dropped 1 per cent during the final three months of last year and apartment prices had remained flat for a second consecutive quarter.
Most banks think they can survive any fallout from the oil drop, relying on the country’s non-oil economy that has aided growth in recent years, a report last month from the central bank that gauges credit sentiment suggested. Meanwhile, smaller banks with little exposure to big corporations and sovereign wealth funds, such as the Ras Al Khaimah-based Rakbank, will be better insulated.
Despite the slump in oil, the result of the Central Bank’s survey of all the country’s lenders released last month showed robust demand in credit in the second half of last year, with two-thirds of respondents expecting a pick-up in demand during the first quarter of this year.
“We strongly believe that the UAE economy is fundamentally solid enough to absorb the impacts of acute volatility in the commodities market, even in the case of a prolonged downturn,” said Andre Sayegh, the chief executive of FGB.
“The competitiveness and strength of the UAE economy go far beyond the price of the barrel of oil.”
Still, the drop in bank deposits may have a trickle-down effect, limiting the amount that banks can lend. That money will be used most effectively by lending it to individuals and other high-margin clients such as small and medium-sized enterprises, analysts say.
“UAE banks have relatively low dependency on government deposits, except for NBAD, UNB and FGB,” said Jaap Meijer, the head of financial services research at the Dubai-based investment bank Arqaam Capital.
“The fall in oil prices could prompt governments to reduce their deposits held at the commercial banks, and this could reduce the availability of credit over time.”
In the past couple of years, UAE bank growth has been propelled by an economy recovering from the financial crash of 2008.
After years of stagnation, lenders started to stage a comeback in 2012 as government spending on infrastructure trickled down to the wider economy, spurring demand for loans to finance everything from home purchases to corporate expansion.
The economy is estimated to have grown more than 4 per cent last year, even after the price of oil fell, and most banks reported a record harvest of earnings.
But as a result of the drop, many economists, including those at HSBC and Standard Chartered, have lowered their 2015 growth forecasts for Arabian Gulf countries. Standard Chartered expects the economy to grow 3.8 per cent this year, slowing from 4.5 per cent last year.
“Our view overall is the diversification that UAE has done outside of the hydrocarbon story will definitely help it weather the decline in oil prices,” said Razan Nasser, a Dubai-based economist at HSBC.
“There is much resilience to the economy overall, given that there are more diverse sources of revenue apart from hydrocarbons.”
mkassem@thenational.ae
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