As UAE leaves behind the recovery phase and steadies itself to a new phase of economic growth, banks, while seeing a big jump in consumer business, are facing the challenge of margin compression in the wholesale arena mainly due to depressed credit growth in the market, according to Standard Chartered’s country head.
“The last three to four years has seen low credit growth in the UAE of around two per cent, which is very low compared to pre-crisis levels”, said Jonathan Morris in an interaction with the local media last week in Dubai.
“Companies in the UAE are continuing to deleverage and the level of new deal flow in the market is low. Most of the deals we are seeing are refinancing.”
In 2012, among the big deals, for example, were DIFC and JAFZA. While there has been little news on deal flows, the economy has been deleveraging and the liquidity increasing in the banking sector, with Loans to Deposit ratios in UAE banks improving over the past two to two and half years—from being above 100 per cent to around 90 per cent today. Some of this liquidity has been driven by non-residents. Amid this peculiar scenario of an influx of liquidity and almost no deal flow, the banks are faced with the challenge of falling margins.
Volumes up
“Margin compression is very real and that is across the banking sector,” said Morris. “Banks are chasing volumes. What the industry is seeing is that volumes are up substantially; however, the high levels of liquidity in the market, is putting pressure on margins. At Standard Chartered, our trade finance and foreign exchange volumes are both up in the high teens, which is reflective of the economy and in particular, Dubai’s economic improvement.”
And he noted that margin compression is pushing banks to undertake a different strategic route in this sector.
“For banks to deliver sustainable performance, you need topline growth and because of the current challenges in growing income, particularly in the Wholesale business, some banks are changing strategy and looking to expand overseas as well as developing new products and services,” the bank chief said.
“What we are seeing is local banks entering into new areas, moving away from traditional commercial banking and developing their investment banking product capability,” said Morris.
Debt capital markets, is an example, with local banks increasingly participating in deals.
Investment flows
“A lot of local banks are now also looking at Asia, expanding internationally to capture the trade and investment flows from and into the Middle East. This type of business was previously very much the area of international banks,” Morris said.
In fact First Gulf Bank is one of the several local banks that are planning to expand overseas to boost their wholesale banking business. The Abu Dhabi based lender plans to open new offices in China, South Korea and Indonesia in the next 18 months as it seeks to raise the international business’ contribution to the overall profit from five per cent last year to “teens or more,” in the next five years, said Andre Sayegh, chief executive officer of First Gulf Bank in an interview with Bloomberg. He also said the bank plans to hire bankers in the areas of mergers and acquisitions and debt and equity capital markets.
Expansion
Late last year, National Bank of Abu Dhabi announced its plans to expand into 41 countries from its then current 14 in the next 10 years, identifying India, South Korea Indonesia, Singapore as some its key growth markets, while making Malaysia its hub for the Southeast Asian region.
As local banks move into new areas, international banks are faced with a new reality. “Our real competition is now coming from local banks as opposed to international banks,” said Morris.
