UAE banks ‘expect to see consolidation in retail and SMEs’
Real estate lending practices have gained maturity
The UAE’s banking sector is expected to go through a period of consolidation this year in their retail and small and medium enterprises (SME) portfolios this year, said Sanjiv Anand, Chairman, Cedar Management Consulting International said.
Cedar has been consulting for a number of leading banks in the GCC and the UAE and is closely linked to the business, operations, and technology transformation of many of these banks.
Commenting on the current trend in the country’s banking sector, Anand said after going through aggressive balance sheet expansion in the post financial crisis years, many UAE banks are reassessing the asset quality of some of their portfolios particularly the SME portfolio.
“Between 2008 and 2015 almost all banks were focused on building and expanding their SME business. But beginning this year, there is a realisation that banks could face asset quality issues from their SME lending and some of these banks have already started taking corrective actions,” said Anand.
The UAE has about 300,000 SMEs with about 100,000 that are eligible for banking services. Currently the total exposure of banks to SMEs in the UAE accounts for about 5 per cent of the total lending in the country while their contribution to total bank deposits in the country is about 6 per cent, according to Cedar Consulting.
Over the years, the UAE banks have clearly segmented the SME portfolio into micro sector with a turnover of up to Dh5 million, and small segment between the range of Dh5 million to Dh30 million and Medium sized enterprises in Dh30 million to Dh100 million category. Depending on the book size and customer reach, banks have extended loans to different categories in the SME segment.
While most of the SME lending is unsecured in nature, the portfolio sizes differ from bank to bank. After going through nearly 10 years of lending growth in this segment banks are clearly consolidating SME lending with more focus on asset quality.
“Banks are closely looking at their SME exposure risks, some amount of corrective action is already under way. We do not expect to see a significant build up in non performing assets,” said Anand.
In the retail banking business Cedar is expecting moderation in asset growth and customer numbers this year. Focus will be largely on the use technology in service delivery, customer retention and predictive analytics in managing existing customers, according to the consulting firm. Cedar believes that the UAE banks are unlikely to follow aggressive branch expansion in the near future as many of them have reached saturation level in terms of the number of customers served by branches.
The trend of a few UAE banks seeking international expansion during the last few years is seen subsiding as some of them have learnt the lesson the hard way and is focusing on their domestic strengths or have learnt their lessons well enough to survive in the new markets they have entered, according to Anand.