UAE banking sector profits may fall between 10 and 20 per cent this year versus 2015 as a slowing economy takes its toll on loan growth, an escalation in levels of bad debt and a rise in expenses amid a spate of new regulations that are forcing lenders to keep more cash at hand, according to Abdul Aziz Al Ghurair.
But on the flip side, the worst is behind the sector in terms of money needed to be set aside for loans gone sour and next year banks will probably report flat profit growth, said Mr Al Ghurair, who is head of the UAE Banks Federation and also the chief executive of Mashreq.
“The economy has slowed down, there is slowdown in tourism, slowdown in trade among our trade partners. Last year we worked with it but it has shown the impact,” Mr Al Ghurair said.
“It’s also been reflected on the banking industry and it has slowed down and this year you’ve seen anything between 10 per cent to 20 per cent, depending on the bank. Next year, I think it will be similar to this year, plus or minus 5 per cent.”
Those effects can already be seen in the latest quarterly results of banks where provisions have been rising, putting a damper on profits. UAE banks have not been having the best of times since the price of oil began its long descent during the summer of 2014. Deposits have dwindled as government-related entities withdrew funds to help fill a growing budget deficit. Among the hardest hit have been small and medium-sized businesses. The executive said, however, that the industry would face other challenges in the coming years including increased costs for having to keep higher reserves and a fixed percentage of provisions for all debt – costs he said that would most likely be passed on to customers.
In a wide-ranging media conference in Dubai that lasted an hour-and-a-half, Mr Al Ghurair said that a previously announced Dh7 billion bailout initiative for businesses facing bankruptcy, included Dh4.5bn of debt held by small and medium-sized enterprises. That latter figure had not been previously disclosed. Mr Al Ghurair said, however, that the pace of bad debt among small businesses had slowed, echoing a number of other senior executives who are reporting the same trend.
The head of commercial banking at National Bank of Abu Dhabi said last week at an SME forum in Dubai that the fallout from the SME debt crisis has abated, but many owners are still facing difficulties repaying lenders following the crash in commodity prices.
Continuing on the subject of small businesses, Mr Al Ghurair said that the recently passed bankruptcy law – expected to boost entrepreneurial animal spirits – will probably take effect some time early next year with court-appointed committees set to restructure businesses gone awry.
The lack of insolvency regulations during Dubai’s credit crisis between 2009 and 2010 led to a number of businessmen being detained for unpaid debts, with many fleeing the country to avoid arrest. That scenario has been replaying itself on a much smaller scale over the past two years as SMEs face difficulty in repaying debt amid the collapse of oil prices and the subsequent fall in government spending. The bankruptcy law will reduce the risk of criminal prosecution for defaulting on debt and promote the restructuring of loans instead.
“The bankruptcy law is a great thing and the banks federation has been pushing for this, to get it fast-tracked,” Mr Al Ghurair said. “Hopefully it will be implemented in the first quarter of next year.”
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