Dubai: One year after the UAE won the right to host Expo 2020, leading banks and financial institutions say the financial services industry in the country has already started reaping the benefits of the event.
Financial results of leading UAE banks for the first nine months of this year point that lending has picked up and the outlook for the year ahead looks bright as a significant increase in lending is expected as government boost infrastructure spending and private sector begins projects related to Expo 2020, according to bankers and analysts.
Dubai Islamic Bank (DIB), UAE’s largest Islamic Bank by assets reported a 13 cent growth in total assets for the first nine months of this year to Dh128.5 billion as its net financing portfolio increased by 27 per cent to Dh71.1 billion. For the third quarter the bank reported Dh723 million net profits, up 57 per cent compared to Dh461 million in the same quarter last year.
The bank expects to sustain the asset and profit growth. “There is a clear upward momentum in the UAE economy. The outlook is looking bright on strong economic expansion driven by both government and private investments. Investments linked to Expo 2020 have clear positive impact on the banking sector,” said Dr. Adnan Chilwan, Dubai Islamic Bank’s Chief Executive Officer.
After going through more than five years of deleveraging and balance sheet repair following the global financial crisis, UAE banks have started to expand lending. Most banks in the country are flush with cash, thanks to strong capital inflows into the UAE due to the safe haven appeal of the country, low interest rate environment across the world due to cheap money policy followed by leading central banks around the world and significant CASA [current and savings account] deposit growth witnessed by banks.
The Expo 2020 related projects are expected to boost the loan demand. According to various estimates Expo related infrastructure projects require about Dh30 billion in funding. With many projects expected to start as early as next year, government related entities (GREs) and private sector companies that execute these projects are expected to tap both debt capital market and bank market for funding.
“EXPO 2020 should provide a socio-economic legacy for Dubai with expanded infrastructure, job creation and the enhancement of Dubai’s position and profile on the global stage. It has already started to attract limited funding from capital markets,” said Stuart Anderson, Managing Director & Regional Head Middle East of Standard& Poor’s.
Analysts are expecting a significant boost in the previously predicted growth rates of 4 per cent in the economy as a result of the impact of Expo. Shanghai achieved 13 per cent GDP growth in the five years leading up to the 2010 Expo. Bank of America Merrill Lynch estimates a $23 billion boost to the Dubai economy between now and 2020 and Arabia Monitor predicts that total receipts from visitors to Expo 2020 could reach $60 billion.
Bank of America Merrill Lynch estimates that given that Expo construction work would start in 2016, fiscal room to accommodate the additional spending without jeopardizing debt dynamics could have sensibly increased by that time. “The Dubai government’s policy is to cover current expenditures with current revenues, and to borrow to cover capital spending. This suggests the incremental Expo-related investment needs will likely require further borrowing,” said Jean-Michel Saliba, Mena Economist at Bank of America Merrill Lynch.
Growing funding requirements are expected to keep both local and international banking institutions vying for financing opportunities for the next five years. “The official figure shows World Expo 2020-related spending of Dh88 billion ($24 billion) over 2014-2020. However, a significant portion of the spending on infrastructure projects would still have taken place as part of Dubai 2020 vision. Most of the planned spending is expected to be financed by additional borrowing,” said Garbis Iradian, Deputy Director of Institute of International Finance.
Experts say the Expo is likely to have a number of secondary and indirect effects to the financial advisory services, in addition to the direct opportunities to advise on the capital for projects to build new infrastructure. Private-sector credit growth in the UAE is expected to accelerate between 2014 and 2020. Analysts say apart from the Expo related credit demand both consumption and investment demand will drive the credit growth with larger credit demand coming from the corporate sector.
With already high levels of credit exposures many GREs have, and new credit exposure limits set for these entities by the central bank, analysts say many GREs will have to look for alternative funding options outside of the banking system. Alongside higher bank funding, other forms of funding will remain important, particularly bond and sukuk issuances giving a strong fillip to the capital market development efforts in the country.
“There is a general positive effect for 2020 and that’s not only a feel good factor but a real factor that will help the economy. All this activity will end up with the financial sector, which will be more active and providing more financing options, more participation options and I think the financial sector will be a big beneficiary of 2020,” said Shehab M. Gargash, chairman and founder, of Daman Investments.
After a gap of six years, foreign banks, particularly European banks are back in the market, ready to lend big time in the UAE. Thus funding to the Expo related projects are expected to be done through a mix of bank funding and capital market funding and direct public and private investments. In all these scenarios, banks are going to benefit through intermediation, fees and commission incomes.
“Credit Suisse, alongside our peers in the financial services industry, will naturally intend to play a major role in financing the growth in public and private investments ahead of the event. Our own strategy will focus primarily on debt and equity capital markets where we can leverage our leading capital markets franchise and our institutional investors relationships globally to attract capital and investments into the local markets,” said Adel Afiouni, Managing Director of Credit Suisse in the Investment Banking Division and Head of Europe Middle East and Africa.
Leading international banks such as Citi, Societe Generale, HSBC and Standard Chartered, to name a few, have expressed their keenness to expand their UAE balance sheets to support both public and private sector projects.
“We see the UAE as a market with significant growth opportunity considering factors such as the economic growth, demographics and its ability to attract global business,” said Jim Cowles, Citi EMEA CEO.
HSBC with a substantial commitment to the corporate and small and medium enterprises (SME) sectors in the UAE. Driven by the growing optimism in the economy, the bank recently launched Dh1 billion fund as the second tranche of its fourth International Growth Fund (IGF) for UAE SMEs. The bank’s first allocation of Dh1 billion in 2013 has been fully assigned to businesses.
“The evolution of the UAE as a global trade hub, the attention the country has attracted globally following winning the bid to host Expo 2020 has helped to boost the business confidence in the country,” said Chaker Zaraiki, Country Head of Business Banking, UAE.
