New lending dries up, but banks see record income from interest rates as their savings fail to trickle down to customers.
Bank lending flat, income up
Big banks all but turned off the tap on new loans in the last months of last year, but their financial statements show income from interest charges grew sharply.
While growing bank profitability is good news for the economy, banks' failure to pass on the benefits of lower interest to their customers is an obstacle to growth for companies.
Lending growth was sluggish between September and December. First Gulf Bank's net loans were almost unchanged from the previous quarter at Dh96.5 billion (US$26.27bn), while National Bank of Abu Dhabi (NBAD) cut lending by 1.5 per cent to Dh136.8bn.
Abu Dhabi Commercial Bank (ADCB) increased total loans by 2.5 per cent to Dh123bn after it added Royal Bank of Scotland's retail banking business to its books in June. Emirates NBD has not yet released its earnings for the year. However, many banks reported larger earnings from their loan books in the last quarter compared with the previous quarter. ADCB's net interest income soared 20.5 per cent to Dh1.03bn, First Gulf Bank's net interest income rose 9 per cent to Dh1.11bn.
NBAD did not provide a figure for net interest income in the fourth quarter but interest income rose 12.9 per cent to Dh5.01bn for the full year compared with 2009.
Easy credit was one factor that helped fuel the financial crisis, but now economists say the pendulum has swung too far in the other direction, with an absence of lending making it difficult for companies to grow. Hemant Karamchandani, the manager of Passion Jewellers in Dubai, said the rate of interest he paid on business loans had increased from 7 per cent before the crisis to 12.5 per cent last year.
"We used to borrow more money from the bank, but after the recession the interest rates have got very high, and the paperwork has become more complicated. It used to take two or three days, now it takes a month to get approved."
Before the financial crisis, such had been the easy access to credit that some banks had been able to raise money below Emirates interbank offered rates (Eibor), the benchmark lending rate. But those days are long gone, according to Abdulla al Otaiba, the general manager of corporate banking at NBAD.
"NBAD had issued a lot of loans in the past to entities that used to enjoy rates of 50 [basis points] above Eibor or Libor [London interbank offered rates]. Now it's 2 per cent to 2.5 per cent to those same companies," he said. "Naturally we've had to increase the price of loans. We can no longer afford prices close to Eibor plus 50 [basis points]."
Because of the dirham's peg to the dollar, Eibor rates tend to follow US dollar Libor, the equivalent US measure. However, for much of the past year a large gap existed between the two rates.
Ali al Kayed, the chief executive of CoolMedia, a start-up based in Abu Dhabi, said the high rates of interest on bank loans had turned him towards other sources of funding. "We did try to [access bank funding], but we thought that if we had done it through a bank it would have had a high rate of interest."
Murad Ansari, a financial analyst at EFG-Hermes, said low growth of loans was also driven by "lower appetite from corporates, who have been trying to manage balance sheets, rather than banks not being in a mood to take on more risk".
However, Jaap Meijer, a senior financial analyst at Alembic HC Securities, said interest margins in the UAE were lower than elsewhere in the Gulf, averaging about 2.5 per cent.
ADCB and First Gulf Bank declined to comment.