Retail therapy... for banks

Faced with high-profile debt restructurings, corporate defaults, deleveraging and mounting loan impairments on account of portfolio losses arising from asset price deflation, UAE banks are increasingly seeking to enhance their retail businesses to compensate for the decline on the corporate side.

New lending overall is expected to be fuelled mainly by retail banking and spending on government projects as private companies remain skittish about borrowing and expanding their activities.

"After the crisis, the banks will focus on infrastructure and government-related business and projects in Abu Dhabi, and secondly retail banking and thirdly corporate banking," says John Tofarides, an analyst with Moody's Investors Service.

Banks are also increasingly expanding the liability side of their retail business to balance their loans-to-deposit ratios. The aggregate loan-to-deposit ratios of banks operating in the UAE, according to Central Bank figures, was at 105 per cent at the end of May.

With rising impairment charges on both portfolio investments and loans, a lower proportion of loans in relation to deposits is considered a sign of balance sheet stability. With the rising cost of funding in the international markets, most banks are wooing retail deposits.

Strong revival

"For the past six months we have witnessed a strong revival in consumer banking business in the country. While the financing activity has picked up, we have witnessed strong growth in both the assets and liability side of our retail business," says John Chang, head of consumer banking, Noor Islamic Bank.

While the global financial crisis has forced commercial banks in other parts of the world to close expensive branches and look for ways to cut costs, the focus in the UAE has been on finding ways to expand the retail distribution channels.

Emirates NBD, the largest UAE bank by assets, has said it will continue to expand and build on its existing network of 102 branches and 500 ATMs. "Our retail strategy is working well in balancing assets and liabilities. Funding remains stable and deposit mobilization initiatives proved successful. While our headline loan-to-deposit ratio has come down to 103 per cent at end of the second quarter from 118 per cent at end-2009, customer deposits increased to 79 per cent from 73 per cent in the same period," says Rick Pudner, the bank's CEO.

Most banks are taking the organic route to retail expansion by adding new distribution channels, value-added products and personalised services. Noor has recently launched its advantage package, a ‘holistic banking solution' that offers preferential terms on credit cards and personal finance and a pre-approved Sharia-compliant overdraft facility.

Emirates NBD recently launched FlexiDeposits, an innovative product that allows customers to make partial withdrawals from their fixed deposits, while still keeping the rest of the deposit intact.

Customers are becoming increasingly selective and value-conscious. "The focus is on getting innovation at the right price and in the most convenient manner. Emirates NBD has devised several retail banking products that provide enhanced value, with added convenience and ease," says Vikram Krishna, head of group marketing, Emirates NBD.

Abu Dhabi Commercial Bank (ADCB) has gone a step further by acquiring Royal Bank of Scotland's (RBS) retail business in the UAE to expand its market reach. ADCB has 49 branches and 175 ATMs and more than 340,000 retail customers. The acquisition should further enhance ADCB's franchise by leveraging RBS's established local retail banking presence with the addition of more than 250,000 customers, 51 ATMs, three new branches and two customer service centres.

ADCB sees the newly-acquired RBS retail business in the UAE as an ideal strategic fit for its existing lines. "This acquisition adds significantly to the two strategic growth engines of ADCB's consumer banking franchise — credit cards and the mass affluent wealth management business," says Arup Mukhopadhyay, executive vice-president and head of consumer banking, ADCB (see accompanying interview).

Foreign banks

Taking their cue from the local banks, some of the foreign banks operating in the country too are aggressively expanding their retail products and distribution channels in the UAE.

HSBC has said it is pushing ahead with aggressive product innovation to enhance its market share in both retail loans and deposits. It has made a substantial investment in its Direct Banking channels, boosting their convenience and security. More than 40 per cent of over-the-counter transactions can be conducted using these channels, therefore helping tellers manage customer flows more efficiently.

"Product innovation is a crucial aspect of the retail banking market, as the providers of financial services need continually to meet the changing and growing needs of customers; this includes how customers want to communicate and work with banks. All banks will need to innovate to continue to deliver to growing customer need," says James Pearson, head of assets and liabilities, HSBC UAE.

Bank of Baroda, the only Indian bank offering a full range of banking services here, plans to expand its customer reach through more customer service centres and electronic banking service units. It is in the process of adding five more electronic banking units in the UAE. Despite the financial crisis impacting the volume of lending activity in the country, Bank of Baroda reported 39 per cent growth in assets last year, with retail contributing more than half of the balance sheet growth.

"Most of our initiatives and new products and services are targeted at retail customers. Today the bank grants all types of loans such as personal loans, car loans and home loans. [It] has also introduced wealth management services with a special focus on non-resident Indian customers," says Ashok K. Gupta, chief executive (GCC Operations) of Bank of Baroda.

Risk aversion

Yet, although banks have not started downsizing their operations, a high level of risk aversion has nevertheless inhibited their retail lending activities. The analytical perspective tells a somewhat different story from what we have heard from the banks themselves.

The International Monetary Fund said in a recent report that the decline in lending and profitability of the banking sector in the region is a temporary phenomenon.

Illustrating the point, the retail banking business in the UAE has faced relatively fewer redundancies, according to bankers. Despite anaemic deposit and credit growth during the first half of this year, analysts say banks here are unlikely to cut their retail staff.

The IMF's report noted that the UAE financial system went into the global crisis generally from a position of strength, with high capital adequacy and modest levels of non-performing loans. Banks' capital buffers remain high, it said. But it pointed to sluggish credit growth not only due to increased risk aversion, but limited success in attracting private sector deposits and continued reliance on public sector support.

A recent stress test conducted by Shuaa Capital on eight of the leading local banks, accounting for more than 70 per cent of total assets in the UAE, confirmed the IMF's conclusions. Shuaa's stress test came at a time when the worst of the recession appeared to be over, but local banks remain in a cautious mood. Shuaa recommended government support to fortify bank's balance sheets.

"In our view, additional measures could be taken by the authorities to ‘clean up' balance sheets and encourage banks to resume lending. The Irish approach of removing high-risk assets from balance sheets and replacing them with low-risk government securities should be considered in the UAE," said Khatija Haque, an economist at Shuaa Capital.

So, although retail business is seen as a core element of balance sheet growth for the UAE banks in the medium term, the turbulence of recent times is still having its effect, and macroeconomic factors such as oil prices and population growth will play a crucial role in future outcomes and strategies.

Banks will have to shop for business carefully till their concerns for non-performance drops.

  The writer is the Deputy Business Editor of Gulf News.