Bloomberg News

U.A.E. Bank Margins Reduced as Lending Slows: Arab Credit

November 14, 2012

U.A.E. Banks’ Profitability Hurt as Lending Slows

A customer uses a cheque deposit machine inside an Emirates NBD PJSC bank in Dubai. Photographer: Duncan Chard/Bloomberg

United Arab Emirates’ banks, struggling with bad loans after Dubai teetered on the brink of default in 2009, are seeing profit margins shrink as lending slows and falling interest rates curb gains on investments.

The net interest margin, the difference between what banks earn from loans and what they pay on liabilities such as customer deposits, has dropped for the top five U.A.E. lenders this year, according to data compiled by Bloomberg. The measure at Emirates NBD PJSC (EMIRATES), the U.A.E.’s biggest bank by assets, slipped to 2.35 percent in the third quarter, from 2.85 percent at the end of the year. Second-ranked National Bank of Abu Dhabi PJSC posted a decline to 2.16 percent, from 2.4 percent.

Bank lending in the U.A.E., the second-biggest Arab economy, has risen 3.2 percent in August from a year ago, about a fifth of the rate in Saudi Arabia and a 10th of that in Qatar, according to central bank data. U.A.E. banks are also setting aside more cash to meet new liquidity rules from January and are earning less on that cash as interest rates decline.

“Credit growth remains very limited” and the trend of falling net interest margins is probably there to stay, Timucin Engin, a Dubai-based associate director at Standard & Poor’s, said by phone yesterday. “In the absence of loan growth in a low interest rate environment,” banks are forced to park funds in short-term instruments like certificates of deposits which earn lower interest rates and so hurt margins, he said.

Benchmark Rate

The three-month U.A.E. interbank rate, a benchmark used by banks to price some loans, has fallen 22 basis points, or 0.22 percentage points, this year, and has held at 1.3 percent since Oct. 18. That compares with a 19 basis-point increase in the three-month Saudi interbank rate this year to 0.97375 percent yesterday, according to data compiled by Bloomberg.

U.A.E. bank credit rose more than 30 percent annually from 2005 to 2008, as a surge in property investments boosted bank profits. Growth slowed from 2009 as the global credit crisis pushed companies to cut back on investments and Dubai state- owned companies such as Dubai World rescheduled debt repayments.

Banks are also restraining lending after a new central bank rule was introduced imposing a cap on loans to governments and state-owned companies. According to the new regulation, banks can’t lend more than 100 percent of their capital to local governments and state-related entities. Institutions had until Sept. 30 to comply. There was no limit under previous rules.

Boosting Competition

The U.A.E., with a population of 8.3 million, has 51 banks. Slower loan growth has boosted competition, with net interest margins at Abu Dhabi Commercial Bank PJSC (ADCB), the third-biggest U.A.E. bank by assets, First Gulf Bank PJSC (FGB) and Dubai Islamic Bank PJSC (DIB), also all declining, according to the data.

Lenders’ earnings from loans “have typically declined faster than funding costs have improved,” Rahul Shah, a bank analyst at Deutsche Bank AG in Dubai, said yesterday by e-mail in response to questions. “Investment yields are also trending down given the low global interest rate environment.”

The U.A.E. currency, the dirham, is pegged to the dollar and interest rates track those in the U.S., which has pledged to keep interest rates near zero at least until the end of 2014.

Costs Drop

Falling interest rates have also allowed banks to raise funds at lower costs. First Gulf Bank raised $650 million last month from the sale of five-year bonds with a coupon rate of 2.86 percent, compared to the 4.05 percent paid on $500 million of debt in January. National Bank of Abu Dhabi paid a coupon of 3.04 percent for $750 million of seven-year notes in August, compared with 3.25 percent on a $750 million, five-year note in March, according to data compiled by Bloomberg.

“Funding costs are actually looking better for the banks,” Aybek Islamov, a Dubai-based bank analyst at HSBC Holdings Plc (HSBA), said by phone Nov. 12. Banks “have been able to refinance at reasonable spreads compared to what they used to pay historically and the cost of fixed deposits is falling.”

Slow loan growth combined with a 4.5 percent advance in customer deposits in August from a year ago has also led to an increase in funds at banks. Banks are offering cheaper rates on mortgages, cars and personal loans.

“Over the past year or so typical mortgage rates have declined from around 7 percent to 4.5 percent,” Shah at Deutsche Bank (DBK) said. “Rates for certain other consumer financing products have also tightened and on the wholesale side, we believe pricing for the best quality credits remains competitive.”

Asset Ratios

The central bank is imposing new liquidity asset ratios from January aimed at helping banks withstand market disruptions. Lenders will be required to hold 10 percent of their liabilities in “high-quality liquid assets,” including cash, central bank certificates of deposits, U.A.E. federal government bonds, reserves and other account balances at the central bank and local government debt, the bank said in July.

With slower loan growth, “banks are becoming more liquid and their capitalization is becoming stronger,” Engin at Standard & Poor’s said. “We don’t see much loan growth this year, maybe 4 to 5 percent and a very limited amount of growth next year as well, which is not very conducive to earnings growth.”

To contact the reporter on this story: Arif Sharif in Dubai at

To contact the editor responsible for this story: Alaa Shahine at or Dale Crofts at

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