Dubai: UAE personal loans grew at the fastest pace in more than two years in the second quarter as the nation’s economy recovers from one of the world’s worst property slumps.
Personal loans in the second-largest Arab economy expanded 2.1 per cent in the three months ended June 30 to Dh259 billion, according to central bank data. That’s the fastest growth since the third quarter of 2009, data compiled by Bloomberg News show. UAE interbank lending rates have fallen the most in the Gulf Cooperation Council this quarter to a record 1.30375 per cent on August 12.
The property market of Dubai is stabilising as economic growth quickens. Banks are taking on greater risks by expanding consumer loans, including credit cards and mortgages. Loss rates on personal loans fell 50 per cent from 2009 levels, according to estimates of Emirates NBD.
“Two factors are playing out: liquidity is back in the market in a significant way and so banks have more money to lend,” Suvo Sarkar, the head for retail banking at Emirates NBD, said in an interview yesterday. “And the loss rates have gone down tremendously in the last 12 to 18 months for all banks.”
UAE banks that were taking losses on 6 per cent of personal loans three years ago are now seeing defaults on 2 per cent to 3 per cent, Sarkar said. For credit cards, industry loss rates may have fallen to between 5 per cent and 10 per cent from 20 per cent in 2009 and 2010, he said.
The three-month Emirates Interbank Offered Rate, which banks use as a benchmark to price some loans, fell 20 basis points so far this quarter to 1.3225 per cent on Tuesday, narrowing the premium over the equivalent London Interbank Offered Rate to 89 basis points from 107 at the end of June. The three-month Saudi interbank rate is up 1.8 basis points this quarter to 0.95 per cent.
Lower UAE rates may help encourage loan growth among the nation’s 51 banks as the recovering economy gives lenders more confidence to extend credit to the country’s 8.3 million people. The economy will grow 3.4 per cent this year, the second-fastest pace in four years, according to the median forecast of 13 analysts compiled by Bloomberg. Growth in Dubai, which was on the brink of a debt default in 2009, will quicken to as much as 5 per cent this year, according to the government.
“As the UAE economy comes back, after the issues that we have had with real estate, consumer banking will be absolutely critical as a driver of economic growth,” Khalid Al Jibaly, the Dubai-based head of consumer banking for the UAE and the Middle East at Standard Chartered Plc, said in an interview. “Mortgages, credit cards and lending for cars, those continue to do very well, better than in 2011, personal loans are doing the best, because they are the most flexible product.”
Total loan growth of 1.8 per cent in the six months to June, according to central bank data, compares with annual growth of 30 per cent between 2005 and 2008. Mortgage loans extended by UAE banks fell 0.4 per cent in the first quarter, the data show, having reached growth of as much as 35 per cent in 2007 and 2008.
In Dubai’s property market, fourth-quarter home sales are up 67 per cent by value, according to the Land Department. Mortgage lending at UAE banks rose 0.7 per cent in the year to March, the first advance in nine months, to Dh161 billion, according to the central bank.
“The margins in consumer banking are higher,” Shabbir Malek, an analyst at EFG-Hermes Holding SAE, said by phone on August 7. “The risks are higher as well, but I believe we are coming out of a downcycle and I don’t think the consumer portfolio will start deteriorating soon.” Banks including First Gulf Bank PJSC, whose retail banking assets account for 24 per cent of the total, would aim to boost consumer lending, Malik said.
New central bank rules last year capped personal loans at 20 times a borrower’s monthly salary, compared with a general cap of Dh250,000 earlier. The regulator also limited repayment periods to no longer than 48 months, and monthly instalments on retail loans can’t exceed 50 per cent of a customer’s gross salary.
Banks are advertising interest rates on car loans of 2.49 per cent, home loans at 4.49 per cent and personal loans of 3.5 per cent. New York-based Citigroup Inc. offers personal loans starting at 8.99 per cent in the US, according to its website.
Lending by Emirates NBD’s consumer bank jumped 21 per cent in the year to June to Dh19.3 billion as deposits climbed 13 per cent, according to a quarterly results presentation on the bank’s website.
Retail banking “will be a key growth area for investments for us given that the return on assets is significantly higher for retail,” Sarkar at Emirates NBD said. “It will probably take another couple of years for the corporate sector to come back and we are seeing the retail coming back faster.”