Industry News

UAE banks first quarter profit and asset growth likely to remain soft


Asset quality improvements and cleaner books to reduce cost of risks

Dubai: Expectations on UAE banks are modest as they start declaring first quarter results from this week. However, banking analysts expect to see signs of improvement in asset quality and profitability starting this quarter.

With most banks continuing efforts to strengthen their balance sheets through tighter underwriting practices, deleveraging from risky asset classes and limiting exposure to high risk borrowers. Efforts to bring down operating costs and improving yields on lending are expected result in a modest recovery in margins.

During the last four quarters, most leading banks in the country had reported improvement in cost of risks (CoR) with a consistent decline in loan impairments and provisions.

“UAE banks should see CoR and margins start to stabilise, leading to flat year on year earnings, but better than the 4.5 per cent fall in earnings in 2016. We expect margins to somewhat stabilise in 2017 as improving liquidity and increasing rate environment help re-price assets. Consequently, we forecast net interest income to increase 3.9 per cent year on year and remain flat quarter on quarter,” said Jaap Meijer, Head of Equity Research of Arqaam Capital.

The surge in loan loss provisions witnessed by the UAE banks since the second quarter of 2015, particularly from the small and medium enterprises (SMEs) is seen subsiding, however analysts expect some spillovers in provisions to linger for a few more quarters.

While retail loan growth is expected to moderate, job losses resulting from slower economic growth is expected to result in contraction in retail underwritings such as personal loans and credit cards leading to a higher provisions in this segment of the business. However, analyst say average cost of credit in the banking sector is expected remain unchanged in the first quarter and improve further in the second half of the year.

“Credit costs likely would stay at third and fourth quarter 2016 levels or marginally improve due to spillover effect of balance sheet cleansing that occurred last year. We expect CoR to start improving from the second half of 2017 as banks complete the balance sheet cleansing exercise,” said Meijer.

Credit growth

At the aggregate level credit growth in the UAE is seen strengthening. Credit data for the first two months from the Central Bank of UAE show credit growth strengthened to 0.5 per cent month on month in February, the fastest pace since September 2016.

The stronger monthly credit growth in February was largely driven by the government related entities (GRE) segment, which was up 1.9 per cent compared to January following two consecutive months of contraction. Despite the month-on-month growth, annual loan growth decelerated further to 5.4 per cent year on year last month, reflecting the overall soft pace of credit expansion since the fourth quarter of 2016.

“The February data could suggest a tentative pickup in GRE activity as organisations start implementing their 2017 budgets, though we would need to see an ongoing trend developing in the data before confirming this,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank (ADCB).

February data showed private sector credit growth remained weak at 0.2 per cent month on month, resulting in the yearly rate decelerating to 5.4 per cent year on year.

Factbox: Liquidity eases with improving government deposits

Deposits in the banking sector rose by a solid 1.2 per cent (Dh19.5 billion) month on month in February, supporting the easing in liquidity conditions since end-2016. This monthly increase pushed the annual deposit growth rate to 7.5 per cent year on year last month, up from 6.2 per cent in January.

All segments of domestic deposits improved last month by Dh24.7 billion (1.8 per cent growth) including government, GRE and private deposits seeing a monthly increase. Non-resident deposits have fallen by 3.7 per cent year to date and now account for 12.1 per cent of total banking sector deposits, down from 12.7 per cent in December 2016.

Government deposits grew by a robust 7.2 per cent non-resident deposits in the banking sector fell by 2.6 per cent in February compared to January, suggesting that banks may have shed their more expensive non-resident deposits given the higher domestic deposits.

With monthly deposit growth outpacing credit growth in February, the gross loan-to-deposit (L-to-D) ratio moderated to 100.3 per cent from 101 per cent in January, the lowest L-to-D ratio since June 2015.

Despite the 25 basis point increase in UAE Central Bank’s repo rate following the US rate hike of quarter of a per cent earlier this month, analysts say the increase in Emirates interbank offered rates (EIBOR) was limited, largely because of the improved liquidity conditions.

Net government deposits in the banking sector rose to Dh26.2 billion in February, up from Dh12.8 billion in January. This is compared to the government being a net creditor from the banking sector in October 2016 by Dh12.3 billion.

The rise in the government’s net deposits in the banking sector has been a central factor behind the improved liquidity, likely supported by the higher oil price and improved fiscal position.


Gulf News (10/4/2017)

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