Corporations & Consumers - The 'Real Winners'

30 Nov, 2002

To say that there is healthy competition in the banking arena is perhaps an understatement. Some might portray it as having more of a "dog eat dog" ferocity. Others will point out that the service capacity of some 47 banks with 400-odd branches, puts the UAE as the most competitive environment in the world; in terms of the number of branches and outlets serving the smallest segments of domestic population. The jury is clearly out as to the extent of over-banking or otherwise, given that many of the UAE banks have more than 70% of their assets outside the UAE. Therefore the above-referred excess capacity is not for 'local' consumption.

Competition has always been intense in lending to the major corporations and government- owned entities in the country, as there are too few of the latter around and every bank wants to include them in their corporate portfolio! Clearly, the corporations and institutions have been the winners in the latter half of the last Millennium. They drove the pricing down on facilities and loans. Even the regional and global banks based in the GCC, began to woo the biggest and the best corporations to their books. This left out the smaller banks, as they did not have the capital or the liquidity to make it to the top league of such "big ticket lending" - syndicated loans or one-to-one mega lending transactions. Therefore the smaller banks reluctantly opted out of the "photo-ops" i.e. the opportunity to take grandiose pictures with the CEOs and CFOs at press conferences, whenever they have booked multi-million dirham deals!

In some cases the pricing on these big ticket transactions were such that the lending banks had to thereafter claw their way into the corporations and competitively bid for ancillary businesses (letters of credit, guarantees, foreign exchange business, bid bonds etc.), whereby they could make a bit more of these off-balance sheet business opportunities than they could on the loan itself. The other constraining factor was the 7% single obligor limit imposed by the regulators; which restricted the smaller local banks and the large foreign banks from going gung-ho into these high profile borrowing relationships.

Perversely, the pricing trends on corporate lending in the UAE and in the Gulf as yet, tend to be substantially lower than for similar quality corporate or sovereign lending in the mature overseas markets. For instance, GE Capital, France Telecom or the well-known consumer giants of Europe currently borrow money at higher interest rates than large corporations or business houses in the GCC. But the come-uppance will come in sooner than later. Soon most of the banks will realise that if they continue on a lending spree to un-rated domestic corporates, they will be caught out when the new BIS norms or the Basle capital adequacy rules click-in, estimated to be in 2006. At that point in time, the regional banks would have to either rely on external credit ratings or robust internal rating processes. Or else, they will be required to allocate more capital against un-rated domestic risk assets, than they do; as of now.

No wonder, many large banks are choosing to move heavily into the retail arena as (a) this does not require much capital outlay and (b) the risks are perceived as being perceptibly lower. While one large loan could scupper a small bank or set it back by a few years, in terms of P&L impact; a large number of retail borrowers, on a portfolio basis, can lead to diversification. Even if 3% of the retail lending portfolios are regarded as doubtful of recovery and prudently 'provided against' during normal times and maybe upto 5% during times of stress, such provision levels are more than adequately compensated by the excellent profit spreads available on the retail lending book as such, on the whole.

In the last few years, the MNC banks have joined the retail fray in the region. It has thus become a "no-holds" barred fistfight for acquiring retail customers. Even smaller local banks from the Northern Emirates have got into the act in the UAE. The temptations offered to the customers are galore - free tickets, frequent concerts, entertainment, interest rate cuts, extensions of repayment periods, waiver of repayment on special occasions i.e. a whole host of benefits. At the higher end, airport lounges, valet parking, colour and metal-coded credit cards ranging from the simple green and the blue to the platinum, gold & black. Mercifully, they have left some stones unturned. Otherwise precious stones such as jade, ruby, diamonds etc. would have also come in handy to signify higher and richer categories of customers.

Hence the push towards the build up of a retail franchise, using not just regular bank employees but out-sourced "commission-hungry, adrenaline-thumping" sales forces for literally selling car and personal loans and credit cards and in many instances, giving them away practically free! The idea behind this frenzy is that once you hook the customer in by giving him loans and making him buy things that he may not need or want in the first instance, you can quickly lock in his salary and via deductions, the bank can feel comfortably home and dry!

The early leaders and the first to market American and local banks have it good, raking in the plenty! The liberal profit margins are now coming under pressure; as the banks outbid each other for the customer business, even going to the extent of refinancing each others' consumer portfolios i.e. enticing the customer to bring his indebtedness with him by charging him a lower rate. Given their current low cost of funds, all this still provides for upto 4% net profit.

Similarly on credit cards, some institutions charge 1% to 2% per month i.e. upwards of 12% annualised. No wonder, credit cards are being virtually pushed down into the wallets of customers. In some instances, the customers have proved cleverer; they pay say Dhs. 500/- for getting a new card and get an air ticket worth Dhs.1,500/-. Quietly taking the card, they use up the air ticket and then not use the credit card thereafter, leaving the issuing bank in the lurch. Now the latter have become wiser in doling out such free-bees and have moved them to personal loans where the customer has escape route.

In a sense, the customer is the real winner in the 'battles royale". He gets air tickets, lavish attention and such compelling price incentives, as to make him the un-crowned monarch in this free for all! He calls the shots as he can vote with his feet by walking out with the cards and loans to the next bank that offers him a better deal.

This is where the regulators need to step in and rein in the more aggressive banks to balance their risks and their pricing in order that they do not always adopt casino tactics i.e. literally launching lotteries and picking winners. The near usurious rates charged on credit card lending and some personal loans ought to be frowned upon by the regulator as not being conducive to healthy banking in the long run. A banker of the 19th century would view some of the current happenings in the regional markets with horror and hardly recognise the bank of today. The retail bank tends to become the darling of their customers one day and a monster that takes a greater share of his wallet, on another. As the French say, this may well be c'est la vie'. While one cannot stop the clock, one needs to do a time and reality check from time-to-time!, whether the game is still on or over.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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