* Local banks' loan growth far outpaces market
* Part organic, part purchasing others' loan books
* UAE institutions become prominent in bank loan groups
* Fears of lending shortage appear excessive
* But future growth likely to be moderate
DUBAI, Aug 21 (Reuters) - Banks in the United Arab Emirates
are filling the gap left by European institutions pulling back
from the country's loan market - a trend that benefits local
lenders even as margins face pressure and regulation weighs on
growth.
Lending in the UAE, the second biggest Arab economy, grew
just 1.8 percent in June from the end of December, according to
central bank data.
But most local banks reported loan growth that exceeded the
market rate. Six of the eight largest local banks by stock
market capitalisation did so, led by First Gulf Bank
with a 6 percent rise and Mashreq, up 5.1 percent.
Even smaller local banks appear to be profiting from the
pullback by European banks, which are becoming more conservative
globally because of financial pressures at home.
"With the global crisis in the euro zone, some banks are
focused on their home markets and we have been able to move
under the radar and take market share," Paul Trowbridge, chief
executive of United Arab Bank, the 12th largest local
bank, told a news conference in July.
International banks do not reveal how much they lend into
the UAE and some non-European lenders, most notably Citi,
HSBC and Standard Chartered, continue to play
significant roles in the country's loan market.
European banks have not completely withdrawn either,
especially if they can lend in euros, as shown by BNP Paribas'
role in an $850 million facility for Abu Dhabi's
International Petroleum Investment Company.
"The attitude we've taken is, for the clients who we have
strong, longstanding relationships with, we will continue to
support them and that continues to be the case," said a banker
at one French lender, adding that targeting resources at certain
borrowers was a fact of life for all banks in the current
uncertain global environment.
However, the composition of bank groups on loans to UAE
entities shows a trend of greater local participation.
Just two or three years ago, large deals such as July's
$1.75 billion loan for Dubai Duty Free would have been led by
global names. But of the six banks at the top of that deal, four
were local.
Local banks have also been at the forefront in refinancing
bond maturities for UAE entities, in particular obligations that
were early this year seen as potentially difficult, such as
those for DIFC Investments and Jebel Ali Free Zone.
And on loans linked to projects, traditionally dominated by
European names, it is local banks which are now stumping up
cash. The 4 billion dirham ($1.1 billion) financing package for
the construction of Abu Dhabi airport's new terminal is backed
by four UAE banks and one from Jordan.
FEARS
The rise in lending by local banks suggests that so far at
least, fears that a pullback by European banks would create a
shortage of funding and hurt the UAE economy are overblown.
According to a March report by Moody's Investors Service,
quoting Bank for International Settlements data, a funding gap
could emerge because European bank lending extended to the UAE
as of September 2011 was worth 25 percent of the country's total
2011 GDP of $358 billion.
In addition to cutting back new lending commitments,
European banks have been selling off parts of their regional
loan books to raise money and reduce their risk-weighted assets.
So some of the local banks' lending growth is due to
purchases of loans in the secondary market rather than new
facilities for local borrowers. However, a significant amount of
the growth appears to be organic.
"We're not going to meet targets by going out and buying
loans from retreating banks because there is no relationship
traction to that," Michael Tomalin, chief executive of National
Bank of Abu Dhabi, which posted loan growth of 2.1
percent in the first half, told a July analysts call.
Investors have responded positively to local banks'
performance. FGB's share price was up 17.5 percent in the month
to Aug. 15, with Union National Bank gaining 14.8
percent and Emirates NBD up 14.1 percent.
All indicators of the health of the local banking sector
have improved, said Julian Bruce, director of institutional
equity sales at EFG-Hermes.
"There's an increase in both loans and deposits, spreads are
okay and there is a slight slow-down in provisions, with
non-performing loan ratios also looking healthier," he said.
Loan loss provisioning has been the bane of the UAE banking
system since Dubai World asked to restructure $25 billion of
debt in November 2009.
Some banks remain constrained by fresh impairments - most
notably ENBD, which has posted a fourth straight drop in
quarterly profit because of provisions linked to state-linked
entities.
For Abu Dhabi-based banks, though, the picture is improving;
UNB's quarterly provisions were down 20.5 percent year-on-year.
Future lending growth is likely to remain moderate, however,
both because lessons have been learned from past mistakes and
since loan-to-deposit ratios in the UAE are already high - for
many banks, over 100 percent.
This will make banks picky over borrowers, said one
Gulf-based banking analyst.
REGULATORY BURDEN
Since the start of July, UAE interbank lending rates have
sunk to their lowest levels since 2004 on the back of loose
liquidity in the local and global economies.
While this trend could cut banks' profit margins on
corporate lending, lower borrowing rates are also likely to
encourage more companies to raise new loans. Increased demand
will be welcomed because new regulation has placed a number of
curbs on lending by UAE banks, especially to retail borrowers.
"The continuation of the uncertainty prevailing in the euro
zone, when combined with the increasingly enhanced regulatory
regime in the UAE, means we continue to anticipate limited
quality credit opportunities and a resultant subdued growth in
profits for the balance of 2012," Tirad Mahmoud, chief executive
of Abu Dhabi Islamic Bank, said last month.
Domestic banking rules announced this year include caps on
lending to sovereign and government-related entities, a
requirement to hold liquid assets worth 10 percent of
liabilities and further debt forgiveness for UAE citizens.
The impact of heightened regulation is already being felt,
with UNB citing lending restrictions to individuals brought in
last year for a 14 percent drop in fee and commission income in
the second quarter compared with the same period last year.
But with sentiment in the UAE economy improving, especially
as the real estate sector begins to show signs of recovery, new
corporate lending opportunities are likely to surface.
"We think customers will want to take advantage of market
conditions to take down some debt and finance new business,"
said Tomalin, whose bank aims to increase its loan book to 170
billion dirhams by the end of 2012 from 162.8 billion in June.
(Editing by Andrew Torchia and David Cowell)