Cars to Mom and Pop Shop Loans Drive Dubai Bank: Islamic Finance

Emirates NBD PJSC’s (EMIRATES) Islamic banking unit expects to double profit in 2013 as individuals and small businesses take out more loans amid Dubai’s economic revival, the chief executive officer said.

Emirates Islamic Bank PJSC, wholly owned by the biggest United Arab Emirates lender by assets, will seek to boost net income to 150 million dirhams ($41 million) this year from about 80 million in 2012, Jamal Bin Ghalaita said in an interview. The lender said last month it would raise capital by 63 percent to 3.9 billion dirhams through a rights issue.

Banks in Dubai, still struggling with non-performing loans stemming from the 2008 real estate crash, are stepping up efforts to boost Islamic finance as the industry’s global assets are set to double by 2015. U.A.E. loan growth of 2.8 percent in October was the slowest in the Gulf Cooperation Council as lenders scaled back credit to government-related clients following efforts by the central bank to limit their exposure.

“We’re aiming for big-but-cautious growth and the more diversified you are, the safer you are,” Bin Ghalaita said at his Dubai office on Jan. 14. Emirates Islamic will focus on retail, small- and medium-enterprises and commercial banking, including trade finance, “which is the core business of Dubai,” he said.

Retail Shift

Emirates Islamic’s 4.147 percent 2018 bonds have rallied since they were sold in July, sending the yield down 93 basis points, or 0.93 percentage point, to 3.22 percent today, according to data compiled by Bloomberg. That compares with a 16 basis-point average decline from the same period to 2.77 percent yesterday for debt of banks in the six-nation GCC tracked by HSBC/Nasdaq Dubai’s GCC Financial Services U.S. Dollar Sukuk Index.

The lender, which offers services that comply with Islam’s ban on interest, is seeking to boost retail lending to 60 percent of the total from 40 percent now, Bin Ghalaita said. Corporate loans currently make up the majority.

Lending to small businesses, personal loans, credit cards and home financing are “resilient” because they spread risk over a large pool of customers, Bin Ghalaita said.

Dubai is shifting focus to Shariah-compliant finance as global assets may reach $3 trillion by 2015, according to forecasts of Standard & Poor’s. The emirate said this month it would create an Islamic finance council to regulate equity and fixed-income products as it seeks to become an industry hub.

Mortgage Caps

The move comes as the city, which was on the verge of defaulting in 2009, recovers from a real estate crash that sent home prices tumbling more than 65 percent from mid-2008 peaks. Emirates NBD’s profit dropped in the following two years as lenders grappled with bad loans and credit growth slowed.

Emirates Islamic reduced its exposure to the property market by half to 20 percent and wants to bring it down to 17 percent, which will help shield the lender from the new caps on mortgage lending unveiled last month, Bin Ghalaita said.

The U.A.E. central bank restricted the size of home loans that expatriates can get from local banks to 50 percent of the value of their first purchase, down from no limit previously, as part of new rules which also curb home loans to citizens.

The curbs are “quite challenging” for lenders, Bin Ghalaita said. “It’s going to put big pressure, not on us because we’re not a big player in mortgages, but on banks that rely a lot on mortgages. And these banks and mortgage companies will also face the challenge to book new business.”

Slowest Growth

The new rules may make it harder to revive U.A.E. loan growth, which in October was less than a fifth the rate of growth in Saudi Arabia and below Kuwait, data from the respective central banks show. Moody’s Investors Service last month downgraded Dubai’s biggest banks, including Emirates NBD, for failing to do enough to address the bad loans that piled up following the crash.

Shariah-compliant banking will grow faster than conventional lending since it’s starting “off a low base,” Philip Smith, senior director of financial institutions at Fitch Ratings Ltd., said in an e-mail yesterday. Emirates Islamic’s 2012 net income is equal to just 3 percent of the parent’s estimated 2.5 billion-dirham profit.

Emirates NBD’s shares jumped 6.1 percent, set for the biggest gain in almost two years, at 1:25 p.m. in Dubai on two times the three-month daily average trading volume, data compiled by Bloomberg show.

Islamic Hub

The lender seeks to raise provisions to cover 60 percent of its non-performing loans this year from 45 percent, the chief executive said. “There are some accounts coming out of the woods,” he said.

The bank is boosting capital as part of plans to double its market share to 10 percent over the next three years, and as high as 18 percent in eight years, Bin Ghalaita said. Dubai wants to make Islamic finance a “core industry,” Sami Al Qamzi, director general of the Dubai Department of Economic Development, said on Jan. 9.

The yield on Dubai’s 6.396 percent sukuk due November 2014 fell 14 basis points this month to 2 percent today, data compiled by Bloomberg show. The spread investors demand to own Dubai’s sukuk over Malaysia’s 3.928 percent notes due June 2015 narrowed 10 basis points to 70.

“We are gearing up for growth in the future,” Bin Ghalaita said.

To contact the reporters on this story: Arif Sharif in Dubai at asharif2@bloomberg.net; Sherine El Madany in Dubai at selmadany@bloomberg.net

To contact the editor responsible for this story: Alaa Shahine at asalha@bloomberg.net

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