Consumer lending increased in June by the most on record, as shopping malls filled with customers and card spending accelerated.
Personal loans to residents increased by Dh3.8 billion in June, the sixth consecutive month of increases, according to data from the Central Bank. It was the biggest monthly increase in the three years of Central Bank records.
Total personal lending has increased by Dh15.3bn so far this year. That is equivalent to the total amount of new consumer credit extended over the preceding two-and-a-half years. In all, Dh276.2bn in consumer loans were outstanding at the end of June.
Suvo Sarkar, the general manager of retail banking at Emirates NBD, said stronger consumer confidence was helping banks to boost the amount of income they generate from their cards and personal loans.
The rise in consumer credit is "consistent with what we're seeing through our sales channels," he said. "We're definitely seeing that trend across our counter as well, in terms of growth of spending and growth of loan outstandings."
Credit card and debit card spending among Emirates NBD's customer base had increased by around 25 per cent compared with a year ago, Mr Sarkar added.
"There's definitely more activity in the shopping malls, much more activity in the real estate market, and that's driving spend," he said.
Lenders including Abu Dhabi Islamic Bank and Emirates Islamic Bank have bet on a resurgence in demand for consumer finance this year to diversify their exposure away from corporate lending and the real estate sector.
Consumer confidence has increased in line with an improvement in the economy, which though expected to decelerate slightly this year is beating analysts' expectations.
"The rebound in the UAE's economy appears to have gathered steam towards the end of the second quarter," analysts from Capital Economics wrote in a research note.
"More recent data suggest that the economy got off to a good start in Q3 [the third quarter]. July's 'whole economy' PMI [Purchasing Managers' Index], which covers the entire non-oil private sector, edged up on the back of stronger external demand … The hydrocarbon sector appears to be in decent health too."
With consumer spending increasing, investors have bet on the bonds of retail landlords such as Majid Al Futtaim Holding, which owns Mall of the Emirates in Dubai, and Emaar Properties, which operates Dubai Mall.
During the past year, yields on MAF Holding's five-year sukuk maturing in 2017 have fallen 105 basis points to 3 per cent, while Emaar's five-year Islamic bonds have dropped 130 basis points during the same period to 3.7 per cent. Bond yields move in the opposite direction from prices.
Despite the increase in credit growth, consumer prices appear to be holding steady. Official UAE inflation rates were 1.3 per cent in June compared with the same month a year earlier. The cost of living may nevertheless be taking a toll on residents, with rental costs rising sharply during the past year.
Private surveys of housing costs point to rapidly increasing rental rates especially in Dubai, where the cost of renting a one-bedroom apartment has risen by 35.8 per cent during the past 12 months, according to data from Knight Frank.
A recent consumer survey by Compareit4me.com, a price comparison website, found hundreds of UAE residents saying they are having so much trouble making personal loan or mortgage payments that they are using credit card debt to do so. Annual interest rates on credit cards are around seven times higher than those on personal loans.