The UAE's second-largest bank by assets has boosted consumer lending since 2017.
Emirates NBD Bank PJSC's aggressive retail lending has enabled the Dubai-based bank to eclipse larger rival First Abu Dhabi Bank PJSC in the retail banking segment, but the United Arab Emirates' top bank by assets has the resources to claw back market share.
The two lenders, each majority-owned by the governments of their respective emirates, dominate the UAE's banking sector. Combined, they account for 50.93% of total UAE banking assets, according to S&P Global Market Intelligence data, which also shows that the pair are the second- and third-largest banks in the Middle East and Africa by assets. Emirates NBD has expanded consumer lending, increasing the size of its retail loan book 51% to 91.7 billion dirhams in 2020 from 60.9 billion dirhams in 2017, according to the data.
Retail lending has "been an area of focus for the bank," said Sara Boutros, a senior analyst at Cairo's CI Capital. "We have seen flexible interest rate pricing, new innovative products, branch network enhancements and digital branches."
As a proportion of Emirates NBD's total lending, retail has remained steady, rising to 19.1% from 18.3% in 2017-2020, with Emirates NBD's retail lending surge partly due to its acquisition of Turkish unit Denizbank Anonim Sirketi in 2019. Emirates NBD's retail expansion also encompassed its launch of digital-only sister bank, Liv, in 2017 to woo millennial consumers.
"What's helped Emirates NBD is Liv, which was done on a much bigger scale than any of its peers have attempted," said Shabbir Malik, a bank analyst at EFG Hermes in Dubai. "I'm unsure how much that has translated into new lending, but in terms of expanding its retail customer base it has helped hugely."
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Emirates NBD's lending surge comes despite the relatively lackluster performance of the UAE's economy, which grew by less than 2% in both 2018 and 2019 before shrinking 6.9% in 2020, according to Emirates NBD which forecasts GDP will increase 1.4% this year.
"Generally speaking, retail lending is fixed rate and corporate is floating. So, more retail in a decreasing interest rate environment means banks locked in the higher rates for a longer time, easing out the pain from asset repricing, and the opposite applies too," said Boutros.
"On a net basis, higher retail usually implies higher return on equity."
In terms of domestic market share, as of March 31, Emirates NBD accounted for 17.9% of country assets, 22.0% of loans and 20.2% of deposits, a company presentation shows.
Emirates NBD's retail lending excluding DenizBank expanded 3% in the first three months of 2021 to 45 billion dirhams due to what it describes as strong demand for personal loans, auto loans and mortgages as volumes rebounded to above pre-pandemic levels.
Yet its net loans book shrank 2% versus 2020-end in a decline the bank blamed on dollar strength versus the Turkish lira, impairments and "repayments of deferral support."
First Abu Dhabi, or FAB, formed in 2017 following a merger of state-run competitors National Bank of Abu Dhabi and First Gulf Bank, has followed a different strategy to Emirates NBD. FAB's retail loan book expanded just 3.4% to 73.7 billion dirhams in the period 2017-2020, according to S&P Global Market Intelligence data. Retail as a proportion of total lending fell to 18.3% from 20.6% over the same timeframe.
"The focus was more to de-risk the existing portfolio to ensure healthy risk-adjusted return," said Boutros.
"The strategy has shifted towards more growth lately, with management recognizing retail as one of three sources for growth," she said, noting that the other two were lending to government-related entities and real estate.
FAB's sales volumes of personal loans rose 5% year over year in the first quarter, CFO James Burdett said on a recent analyst call, also noting mortgage lending expanded 2% over the same period. That compares with a 2% annual decline in total loans to 288 billion dirhams.
"FAB's strategy has been to focus on lower-risk lending until the economic cycle becomes more favorable," said Malik.
"Meanwhile, it has been investing in digital technologies and its infrastructure so it's in a good position to regain lost retail market share. Given the size of FAB, I wouldn't be too worried — it can commit a lot of resources to this. Now it has completely integrated NBAD and FGB, FAB is in a position to grow retail lending more aggressively."
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Abu Dhabi's more stringent COVID-19 restrictions versus those in Dubai has also dampened economic activity in the UAE's largest emirate and with it demand for retail loans and other personal banking services.
The UAE's No. 3 bank by assets, Abu Dhabi Commercial Bank PJSC's, or ADCB, reported a 1% annual drop in total loans and advances in the first quarter to 235.7 billion dirhams.
Retail loans account for 13% of gross loans — or 32.1 billion dirhams, according to S&P calculations — with mortgages representing a further 4%. ADCB's retail loan book was 30.0 billion dirhams at the end of 2017. This decline is partly due to its three-way merger with Union National Bank and Al Hilal Bank, which was completed in April 2020.
"During the integration phase, ADCB was focused on ensuring the three banks' systems and workforces were properly amalgamated," said Malik. "In this period, the bank's risk appetite and ability to win new business was impacted. Now the merger is complete, ADCB will be to prioritize attracting new customers and clawing back some of its lost market share."
In February, ADCB agreed to buy a 1.13 billion dirham mortgage portfolio that will be incorporated into its accounts in the first half of 2021.
"You will see some pick-up in ADCB," said Malik.
FAB and ADCB both forecast their total loan books will expand by a "mid-single-digit" percentage. FAB's domestic operations generated 81% of revenue and 83% of its first-quarter profit of 2.48 billion dirhams.
EFG's Malik said renewed population growth — through an influx of expat workers — would be required for a significant increase in retail loan demand in the UAE.
"Market penetration is already quite high, so any growth will remain quite modest," he added.
As of May 18, US$1 was equivalent to 3.67 United Arab Emirates dirhams.