UAE bank earnings are expected to show a drop in the third quarter amid slow lending and dwindling deposits as the low oil price take a toll.
EFG-Hermes, the Egyptian investment bank, estimated that the profit of nine UAE banks it tracks will on aggregate fall by 6 per cent year on year as revenues slow and more money is set aside to cover bad debt.
Not all banks have been hit in the same measure by the slowing economy. While the biggest banks have held their own, some of the smaller ones such as Rakbank and Union National Bank will report slower growth than their bigger counterparts, according to EFG Hermes. Margins, or the money banks make from interest, are likely to be squeezed as there is less money floating in the system and high competition to attract customers.
“In the second quarter of 2016, spreads weakened as UAE banks struggled to pass on higher cost of funds to customers,” wrote Shabbir Malik, a Dubai-based bank analyst at EFG-Hermes, in a report. “We expect pressure on spreads to sustain in the third quarter of 2016, as sector data from August suggest that loan growth is decelerating, and liquidity continues to tighten.”
Not only are UAE banks suffering from the slowdown at home but they are also affected by the woes of neighbours including Saudi Arabia, where businesses involved in construction have been hit by government austerity measures. EFG-Hermes noted that a number of UAE banks have been exposed to struggling Saudi Arabian construction companies including Binladin Group, which is reportedly seeking an extension on an 817-million Saudi riyal (Dh800m) Sharia-compliant loan.
Banks are the backbone of stock indexes in the UAE, accounting for the biggest overall industry weighting on the Abu Dhabi and Dubai bourses. They are also among the most profitable listed businesses and are a proxy for international investors to tap the wider oil economy that is closely held by the government.
National Bank of Abu Dhabi, the biggest lender by assets in the UAE, is expected to see its third-quarter net income fall by 2 per cent to Dh1.3bn from 1.38bn, according to EFG-Hermes. That’s slightly less than the mean Dh1.37bn in profit estimated by five analysts, including EFG-Hermes, who were polled by Bloomberg.
Rakbank, the biggest lender to small and medium-sized enterprises in the UAE, is expected experience a 36 per cent drop in third-quarter earnings to Dh239mn, according to EFG-Hermes.
The bank-profit estimates in the Bloomberg survey, from analysts including NBAD Securities, ADCB Securities and Securities & Investment Company (Sico), are broadly in line with the EFG-Hermes numbers.
Overall, UAE banks have not been having the best of times since the price of oil began its long descent during summer 2014. Deposits have dwindled as government-related entities withdrew funds to help fill a growing budget deficit.
As the economy slowed, many small businesses found themselves unable to repay debt, especially as their clients delayed payments. in November last year, the head of the UAE Banks Federation, Abdul Aziz Al Ghurair, estimated that up to Dh5 billion of debt had been abandoned by business owners gone bust who had fled the country.
Since then, however, the government has accelerated its efforts to pass a new bankruptcy law that will prevent businessmen from being jailed for defaulting on debt. The federal Cabinet approved a draft of the law on September 4
Separately, banks have been helping clients restructure debt. An initiative among local banks to bail out small and medium-sized enterprises has helped to restructure about Dh7bn of debt owed by more than 1,700 companies this year, the UAE Banks Federation said last month.
Follow The National’s Business section on Twitter