Dubai: The first three quarters of 2016 saw the UAE banks reporting a general decline in earnings growth driven by rising funding costs, somewhat elevated non-performing loans (NPLs) and slowing private sector loan growth and rising provisions dragging down profits.
With the full year results of banks to be announced starting this week, bankers and analysts expect UAE banks to report single digit loan growth and anaemic profit growth compared to previous years.
Amid the overall subdued trend in credit growth and profitability, banks continue to remain resilient to difficult operating environment resulting from prolonged low oil prices and a slowdown in the UAE’s economic growth from 4 per cent last year to a projected 2.3 per cent in 2016.
While most banks have claimed at the close of the third quarter that the worst is over for the banking sector in terms of NPL formation from credit stress in the small and medium enterprises (SME) segment, credit quality issues are expected to linger on in both SME and retail portfolios and impact the overall profitability of banks.
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Most banks, including the strongest reported either slowdown or stagnation in net profit growth in the third quarter. Emirates NBD and Dubai Islamic Bank reported flat growth in third quarter net profits, but showed modest growth in profits over the nine month period.
The latest central bank statistics a further weakening of credit growth. The November figures showed that year-on-year credit growth decelerated to 5.8 per cent compared to 6 per cent in October.
Macroeconomic backdrop
While the government related entities (GRE) continued to be a key driver of credit demand in November, the private sector credit growth contracted by -0.1 per cent month on month with a 0.4 per cent fall in corporate credit growth.
“We believe the drop [in loan growth] continues to reflect the soft macroeconomic backdrop. However, retail credit growth accelerated to 0.6 per cent month on month in November which we believe could have been payback from the weak increases seen in the previous two months. Moreover, the increase may be attributed to a possible firming in private sentiment, supported by the stronger oil price outlook,” said Monica Malik, chief economist of Abu Dhabi Commercial Bank.
Analysts say despite a slowing economy, rising cost of funds and a gradual rise in loan impairments the outlook for the UAE banking system remains stable.
“In our view, the country’s banks will maintain stable credit profiles despite a slowing economy and subdued demand for credit caused by low oil prices, said Nitish Bhojnagarwala, Assistant Vice President — Analyst at Moody’s.
While the operating environment for banks is expected to soften in the context of slowing economic growth reduced public spending is expected to soften the demand for credit resulting in domestic credit growth to slow to around 5 per cent annually for 2016 and 2017, down from around 8 per cent for 2015.
Asset quality is seen weakening modestly after a period of strong recovery. “We expect problem loans to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around 5 per cent currently. We expect rising problem loan formation in the small and mid-sized company (SME) and retail (loans to individuals) segments, although continued resolution of legacy problem loans will offset some of this increase,” said Bhojnagarwala.
Concentrated exposures
The rating agencies expect downside risks to banks could stem from the sizeable and volatile real-estate sector and from concentrated exposures to large government related institutions. For the banking sector as a whole capital buffers are expected to improve further from internal capital generation, combined with subdued asset growth.
Liquidity conditions seem to have eased in the fourth quarter with further easing seen in the next few quarters. Deposits witnessed a strong rise, led by the government sector. System-wide deposits in the banking sector rose by a solid 1.2 per cent month on month in November after a -0.4 per cent contraction in October), as banks likely focused on deposit raising at year end. This monthly increase pushed the annual deposit growth rate to 4.9 per cent in November and year to date growth to 3.4 per cent at November end.
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