High-margin retail lending an important revenue stream.
Banks to push credit cards
An array of cash-back and other promotions for credit card owners is the latest sign that banks are trying to boost lending in a climate of consumer restraint. Mashreqbank, which is majority owned by the local al Ghurair family, promises to give card holders 5 per cent back on all purchases, local and foreign. The offer, which is valid for monthly retail sales of up to Dh50,000 (US$13,613), will run next month.
Analysts see the offers as an effort to entice customers to spend, and ultimately borrow, more. "Retail lending is attractive. Right now, banks like small-ticket items and are afraid to lend big," said Deepak Tolani, an analyst at Al Mal Capital. "And keep in mind, there are huge margins on every (credit card) charge." Barclays Bank has been running a promotion since March giving users of its credit cards four times the usual number of reward points. That promotion ends this month.
"With consumer confidence starting to return, we are certainly poised to react positively towards what our customers need and the quality of product and service they have come to expect from us," said Danysh Hashmi, who heads card products at Barclaycard. The 2 per cent credit card fee is generally split between the issuing bank, the credit card company and the clearing institution. In addition, customers generally face annual rates of between 20 and 25 per cent on late payments.
To justify the higher margins, banks point to the higher delinquency rates on this kind of credit, which is unsecured. "In the current economic environment, consumers are looking at options to make their life as financially efficient as possible and need to feel confident that they are getting the best value from their bank," said Vimal Kumar, the head of credit cards at Mashreq. Bank lending has stagnated for many months. But first-quarter earnings suggest a large divide between Abu Dhabi banks, where some have boosted lending by more than 10 per cent, and those in Dubai, which issued fewer new loans.
"More and more banks are coming back to credit cards - they are coming back with a vengeance," Mr Tolani said. Between 2004 and the mid-2008, regional banks increased their lending by as much as 50 per cent annually. Many banks are again increasing their telephone marketing of credit cards after slowing such efforts. This applies particularly to local banks, many of which did not offer new unsecured loans to expatriates last year, when UAE-based banks tripled their provisions for bad loans.
Among the foreign banks, Barclays and Standard Chartered are considered some of the more aggressive credit card sellers. "Six months ago they preferred to lend to entrepreneurs. Now it is once again becoming easier for salaried employees to get credit," Mr Tolani said. Emirates NBD, the country's largest bank by assets, is also encouraging card-holder spending through incentives such as chances in raffles at certain retailers. Emirates NBD said it did 1 per cent less lending between January and March.
"Credit cards are in the interest of banks; they get decent fees," Mr Tolani said. "Clearly, to get someone to have a balance of Dh20,000 or Dh30,000 requires more footwork. "But labour is cheap and margins are huge. This compares with locking in millions for a much longer time in a medium-sized loan for 5-6 per cent." One analyst said international banks scaled back their marketing of cards far less than local banks did last year.
"As far as I can tell, foreign banks never really stopped," said Janany Vamadeva, an analyst at Al-Futtaim HC Securities in Dubai. firstname.lastname@example.org