UAE banks likely to have ended 2015 in good shape despite slowdown

The country’s banks are expected to have held their ground in the last three months of 2015, despite lower oil prices curbing economic growth.

But the pace of earnings growth is slowing down even as a stream of profits from business lines other than loans acts as a buffer to dwindling deposits in the banking system.

Lending is slowing as banks become more choosy about would-be borrowers amid a spate of high-profile defaults by small businesses, such as Atlas Jewellery.

Banks have also been shedding jobs as they keep costs at bay, and analysts expect more cost-cutting in 2016. FGB, one the country’s biggest banks by assets, axed about 100 jobs in November.

“I think the growth is looking like it will be a lot lower than it was in the fourth quarter 2014, which is not surprising given the macroeconomic developments,” said Sanyalak Manibhandu, the head of research at NBAD Securities.

Mr Manibhandu said that the net profit of the eight UAE banks he tracks might increase 7 per cent year-on-year, compared to the 13 per cent year-on year growth they reported for the fourth quarter of 2014.

NBAD Securities’ reduced forecasts from the fourth quarter of 2014 chime with those of others.

Cairo-based EFG-Hermes, a regional investment bank, expects the nine banks it tracks to post a 10 per cent increase in net profits in the fourth quarter of 2015 compared to a 32 per cent increase year-on-year of the profit of those banks in the fourth quarter of 2014.

“Banks have tightened their credit underwriting standards in light of the stress in the SME [small and medium enterprise] sector,” analysts led by Murad Ansari at EFG-Hermes wrote in a note to clients this week.

“Moreover, tightening liquidity in the system is likely to curb banks’ enthusiasm for lending.”

Banks and other financial services firms are starting to experience some signs of strain as the price of oil, a key catalyst for the country’s economic growth, continues to flounder after losing more than half of its value since mid-2014. As well as job cuts, the default rate on loans by SMEs has risen sharply at some lenders.

Sharjah-based United Arab Bank posted a loss in the third quarter of 2015 amid rising defaults. Deposits are also dropping as less oil money trickles through the banking system.

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.

As a result of an expected slowdown in government spending, many bank chiefs expect loan growth to cool this year as economic growth begins to slow and banks become more risk-averse when choosing who to lend to.

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 raised interest rates last month in the aftermath of a move by the US Federal Reserve to increase its benchmark rates by 25 basis points. Because the UAE dirham is pegged to the US dollar, the UAE Central Bank follows US monetary policy.

While the first rise in more than nine years 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. And the price of oil, which dropped more than 35 per cent in 2015, is unlikely to get much relief this year as supply continues to be high and demand from emerging nations such as China continues to be lacklustre.

“So far all indications are that we should brace ourselves for another tough year,” Mr Manibhandu said.

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