UAE banking industry recovery expected

The outlook for the UAE banking sector is expected to pick up in the final three months of this year, according to analysts, despite third-quarter earnings marked by rising levels of money set aside for bad debt.

While lenders continue to grapple with businesses unable to pay back debt amid the biggest drop in oil prices since the financial crash of 2008, analysts said that banks are still holding their ground in terms of revenue from interest income and fees.

“Impairments have continued to increase moderately,” said Jaap Meijer, the head of research at Arqaam Capital, an investment bank based in Dubai.

“Still UAE banks enjoy strong operating earnings capacity and the banks still report low double-digit returns and are in general very healthy. We don’t expect a spike in provisions in the fourth quarter.”

On Sunday Abu Dhabi Commercial Bank said that its third-quarter profit slid 17 per cent year-on-year as provisions for bad loans jumped almost sixfold. But net interest income, the money banks make from lending, fell only slightly in comparison. Its Dubai-based peer Mashreq also reported a 25 per cent year-on-year plunge in profit in the quarter as impairments for bad loans rose 82 per cent.

Last week, Emirates NBD, the UAE’s biggest bank by assets, said that its third-quarter profit slipped as money set aside for bad debt at its Islamic banking unit increased.

However, overall the banking group’s net income declined only marginally.

Sanyalaksna Manibhandu, head of research at NBAD Securities, said much of the loss from bad debt at banks could be absorbed by higher revenue, especially if coupled with a lowering of expenses that banks have been undertaking to deal with increasing pressures.

“Increasing impairment is a feature and the market was expecting an increase,” he said. “Operating income surprising to the upside could help absorb increasing impairment, which we have not yet seen in the UAE.”

Operating income at Mashreq was 10 per cent higher in the third quarter compared to a year earlier and up almost 3 per cent for the period at ADCB.

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 that have struggled in the economic slowdown. It was estimated by Abdul Aziz Al Ghurair, the head of the UAE Banks Federation, last November that small business owners may have left up to Dh5 billion in unpaid debts before fleeing the country.

A credit sentiment report issued by the Central Bank last week showed that in the third quarter banks were less willing to lend and borrowers, especially owners of small businesses and expats, were less keen to tap debt.

The Central Bank’s net balance measure in aggregate for business loans was minus 2.3 in the quarter to the end of September compared with plus 3.1 in the quarter that ended in June.

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