Complex Made Simple

UAE retail banks look to increase market share

UAE banks are building their assets but struggling to lend to individuals and corporates wary of leveraging up. Yet while it's frustrating for the financiers, slow lending growth could prove great news for the man on the street, with banks set to battle for greater market share through better customer service.

According to the UAE Central Bank, the assets of UAE banks have shown impressive growth in the past 12 months, up by 8.5% to Dhs1.686trn ($460bn) year-on-year as of end-July 2011, and up 5% in the first seven months of 2011. It has been a period of consolidation, and one that means most UAE banks are in a comfortable position moving into the fourth quarter of 2011.

However, this reinforcing of the balance sheets has not been accompanied by a significant rise in lending: loans made by UAE banks edged up by just 2.6% to Dhs1.052trn year-on-year as of end-July 2011, up 2% in the first seven months of 2011 but a drop of 0.4% month-on-month.

“UAE banks are in good health but the issue is growth,” says Raj Madha, MENA banking analyst at Rasmala Investments. “There’s little growth in the UAE at the moment and it’s difficult to see where that growth would come from.

“What the banks want to see is growth in the economy leading to growth in bank lending, and that’s what’s missing,” he continues. “When companies are investing more they tend to borrow from the banks to fund that investment. If they’re not investing and they want to borrow but only to build up their working capital, that’s not what banks like – it’s bad lending.”

Banks struggle to find lending outlet despite economic growth

Growth in the economy should be solid, but not spectacular, in the coming years. According to the National Bureau of Statistics, real GDP grew by 1.4% in 2010. The Economist Intelligence Unit, meanwhile, has forecast real GDP growth of 3.3% in 2011, and an average of 4.8% in 2011-2015. Those banks waiting for a UAE-wide economic resurgence to drag them back into double-digit growth will be forced to come up with a different plan.

“Everyone’s struggling to get much growth out of current market circumstances, so while we’re seeing that the appetite for lending has increased, there aren’t too many takers for that lending,” admits Gary Dugan, Chief Investment Officer, Private Banking, at Emirates NBD, the UAE’s largest bank.

“Individuals and corporates aren’t keen to leverage up, and so with the best will in the world, banks are struggling to find customers willing to take on new lending,” he continues. “Banking is muddling along at around about the GDP growth of the country.”

If economic growth continues to fall short of requirements, then analysts suggest UAE banks could concentrate less on growth, and more on service, in a bid to drive up market share and capitalise on the downsizing of operations among some international banks. In the wake of the worldwide economic downturn, some global giants are reassessing their presence in the region and redirecting resources back to their home markets – and local operators must be primed and ready to pick up any resultant slack.

“In fits and starts, international banks in this part of the world build up and then rein in their operations, and just now they are reducing the scale of their operations,” says Dugan.

“A lot of international banks are running back to their home market because of problems there, and the scarcity of capital means that as they try to improve their balance sheets, means that they can’t be so committed to these markets,” he continues. “So there is a lot of market share to be taken in a market that may be static at the moment, but which still represents a great growth opportunity looking forward.”

Dugan’s own department is beefing up its sales force, in a bid to talk to more clients about what Emirates NBD can offer. He says it’s now about capturing market share with a service and pricing proposition, as opposed to simply chasing after new debt issuance.

Focus on customer service improvements

“The focus should not be on ‘hard’ investment because I think we have enough of those,” agrees Madha at Rasmala. “But IT needs continuous upgrading, new products need development, customers need more integration with international services, as well as better call centres, and more value-added propositions – all of the things which make customers happy.”

Each year UAE-based Ethos Consultancy reveals the findings of its annual Bank Benchmarking Index for service excellence, but the last report made grim reading for UAE banks. In 2010 researchers conducted 483 branch visits, contacted call centres to make 378 enquiries, and submitted 231 enquiries via bank websites. The study covered a total of 21 UAE retail banks, comprising 15 local and six international banks and focused on Abu Dhabi, Dubai and Sharjah.

However, the report indicated only a marginal year-on-year increase in the overall performance of customer service in the retail banking industry: only eight banks actually improved their performance, and customer satisfaction with banks’ websites registered at just 43%.

“Our overriding concern is that the Index has improved because of the performance of only eight banks, whilst a significant number of the country’s leading banks are not providing the level of service as those of their competitors and this will ultimately impact on their bottom line,” said Robert Keay, managing director at Ethos Consulting, upon publication of the 2010 study.

“This is most exemplified by the results of the Call Centre measurement, which indicated that many of the country’s leading banks do not respond to customers within two working days of their enquiry, or even record incoming callers’ details,” he continued. “This shortfall in the quality of service needs to be addressed especially as telephone banking is one of the most preferred channels for customers when dealing with their bank.”

“Every year suggests that most regional banks are not performing to the same standards as their international peers,” says Madha. “The gap should be closed.”