UAE bank profits will struggle, says S&P

Profit growth at UAE banks is set to slow as deposits wither amid lower oil prices, says the ratings agency Standard & Poor’s.

That is likely to prompt less lending and more defaults as the cost of borrowing rises, putting pressure on earnings, it said in a report released on Monday.

The UAE is no stranger to boom-and-bust cycles but the rating agency says that unlike the 2009 financial crash, this slowdown may be made worse by a more prolonged period of lower oil prices, triggering less spending on infrastructure and dampening economic growth.

“Although the UAE’s economy is well diversified relative to its peers in the Gulf region, the decline in oil prices and expected decrease in government spending is slowing economic activity,” said analysts led by Dubai-based Timucin Engin.

S&P expects lending to slow to 5 or 6 per cent growth in 2016 from 8 per cent in 2015.

Mubarak Al Mansouri, the governor of the Central Bank, said in November that he expected the UAE’s economic growth to slow to 3 per cent this year from 4 per cent in 2015 as the slump in oil prices affects the government’s ability to spend on infrastructure.

The UAE is the sixth-largest producer of oil in the world and uses revenue from crude sales to fund more than 60 per cent of the federal budget.

Since mid-2014, the price of oil has shed more than 70 per cent of its value as global economic growth reduces demand and the supply of crude increases. S&P, citing central bank statistics, said government and public sector deposits fell 14.2 per cent to US$94.1 billion at the end of November from $109.7bn at the end of September 2014 amid the rout in oil.

The lack of deposits will probably lead to higher interest rates as the amount of money in banks decreases.

And those rates may climb higher if the US Federal Reserve continues to hike rates in 2016, following its first rate increase in nine years in December.

The UAE dirham is pegged to the US dollar and follows the Federal Reserve’s monetary ­policy.

While the Fed’s quarter of a percentage point increase in its benchmark interest rate is unlikely to put a dent in economic growth, analysts say that more aggressive increases in 2016 by the Fed could be unwelcome for the UAE if businesses and individuals shy away from tapping debt to fund growth plans.

Lending is already slowing­ as banks become more par­ticular about would-be borrowers amid a spate of defaults by small businesses, such as Atlas Jewellery. Banks have also been shedding jobs. FGB, one of the biggest banks by assets, shed about 100 jobs in November, joining HSBC and Standard Chartered.

Analysts expect banks to cut more employees in 2016.

“With an eye on tighter liquidity conditions and the weaker operating outlook, UAE banks are beginning to adopt a more conservative stance toward new lending,” Mr Engin said. “We expect banks to be risk-averse regarding lending to small and mid-size enterprises, retail and real estate.”

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