Dubai: UAE banks could further tighten lending standards despite improving economic conditions and lower loan loss provisions last year.
A combination of factors ranging from the decriminalization of bad check cases, legal difficulties in recovering loans and a potential increase in non-performing loans following the exit from UAE Central Bank support measures have made banks more cautious with regard to loans not backed by sufficient guarantees.
Thailand is likely to cut lending to lower-rated individuals, SMEs and companies, especially those that have opted for loan deferrals and restructurings in the recent past.
Focus on blue chips
A trend seen over the past year was that while the country’s major banks preferred lending to government-related entities (GREs) and large corporations, smaller banks also increased their exposures to corporate clients.
“While steady loan growth was offset by prepayments from customers, (this) masked uneven trends across banks [in lending]Abu Dhabi-based banks reported single-digit loan growth, mainly driven by growth in large corporates and government-related entities, while Dubai-based banks’ loan portfolios contracted due to early settlements said Nitish Bhojnagarwala, Vice President – Senior Credit Officer at Moody’s.
Bankers say their loan mix will eventually balance out as risk perceptions change over time. “We have seen the combination of our lower margin businesses grow faster than the growth of our higher margin products which have been more impacted by the pandemic,” said Raheel Ahmed, CEO of RAKBANK.
“However, going forward, we expect this trend to normalize as we seek growth across all of our key businesses.”
Broad indicators like the latest CBUAE Credit Sentiment Survey also point to tighter credit standards for small businesses. The survey notes that in terms of credit availability, the criteria for granting business loans remained broadly unchanged [in Q4-2021]. This is explained by a moderate tightening of the supply of credit to SMEs, offset by a moderate easing of the supply of credit for large companies.
Preference for secured loans
Many banks are exploring opportunities to increase their share of secured lending, where the bank draws on borrowers’ assets. Innovative structures are being developed to hold borrowers’ assets such as real estate, financial assets and credible claims as collateral for loans.
Bankers also use mezzanine financing to reduce the risk of default. Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert debt into business equity in the event of default.
“From a simple risk management point of view, there is a preference for secured loans over unsecured loans,” said Varouj Nerguizian, Group CEO of Bank of Sharjah.
Fear of bad loans
Bankers say they have not forgotten the huge increase in bad loans, mainly in SME loan portfolios between 2014 and 2018, which led to huge provisions.
Although the impact of the pandemic on loan impairments has been largely contained by loan deferral programs and restructurings supported by the CBUAE’s Targeted Economic Support Program (TESS), there are concerns that some of these deferred loans not be compromised in the future.
“We believe some of the deterioration will come from deferred exposures once the CBUAE lifts support measures and companies in still-vulnerable sectors are reclassified,” said Standard & Poor’s analyst Puneet Tuli.
Sectors such as real estate, construction, hospitality, consumer-related sectors and SMEs are expected to take longer and are likely to be the main sources of delinquencies.
Slow loan growth
Data from the top 10 UAE banks analyzed by Alvarez and Marsal shows growth in aggregate loans and advances increased by a quarter of a percent to 1.7 percent in 2021, while deposits increased by 6.7 percent, keeping overall loan growth below pre-pandemic levels.
Data from 2021 shows that UAE banks have remained cautious in granting new loans despite higher liquidity. Analysts say banks are likely to hold reserves deemed too high for their portfolio risk profile, given recent credit trends.
Residential mortgages accounted for around 20-25% of residential real estate demand in Dubai.