Credit losses and low lending to hit UAE banks’ profits this year

Bank lending growth in the UAE fell to 9.5 per cent year-on-year in December from 10.2 per cent in November. Mona Al Marzooqi / The National

Profit growth at five of the UAE’s banks is expected to slow this year because of lower lending and an increase in credit losses, according to Standard & Poor’s.

Net profit growth will fall to about 5 or 6 per cent from 21.3 per cent last year, S&P said in a report yesterday.

Among the UAE's lenders, S&P rates National Bank of Abu Dhabi, Mashreq, National Bank of Fujairah, Abu Dhabi Commercial Bank and Sharjah Islamic Bank.

Oil prices, which have fallen by more than half since June, and the resulting slower economic growth in the UAE will impact the earnings of the banks this year and next, said the S&P credit analyst Timucin Engin.

S&P is forecasting Brent oil prices to average US$55 a barrel this year and $65 a barrel in 2016. The banks’ ratio of credit losses to average assets fell to 0.4 per cent last year, down from 0.6 per cent in 2013 because of the recovery of credit losses from previous years, Mr Engin said. The banks’ net revenue grew 8.4 per cent last year compared with 21.3 per cent growth in net income, S&P said.

“Banks were able to have all these recoveries … but we don’t see this continuing into this year,” said Mr Engin. “You look at overall revenue growth. The net income growth is significantly higher than net revenue growth, and the difference is coming from [the recovery of] these credit losses.”

Lending growth, which is expected to average between 7 and 8 per cent this year, will be hit by a slump in the property market and volatility in the equity market. Property prices are expected to fall an average of 10 per cent this year, the property broker JLL has forecast. Equity markets have fluctuated with the volatility in oil prices.

Bank lending growth in the UAE fell to 9.5 per cent year-on-year in December from 10.2 per cent in November, Central Bank data showed this month.

“Some of the key government project funding will still be there, but arguably banks will be bit on the conservative side when they lend to new exposures to the private sector, and particularly to the retail sector,” Mr Engin said. “We might see banks becoming a bit more selective in extending exposures to the corporate sector because they probably will not have the same liquidity they had in the recent past.”

Lending to government-related entities (GREs) is expected to remain strong — unlike during the financial crisis, when banks stopped funding some GREs because of their mounting debt piles.

“Although we see some macro drivers as potential pressure generators on the banks — such as this low oil price, its impact on capital markets, its impact on GDP, the potential tilt in equities and potential weakness in real estate prices — on the other side, there is one structural strength in UAE banks we see this time around, which is potentially strong GREs,” said Mr Engin. “We have seen quite visible deleveraging in the GRE space over the past few years.”

Even property companies, which got into debt during the financial crisis, are in a better position to weather the tide of low oil prices and dampened investor appetite for property. Banks have about 30 per cent exposure to the property and construction sector, Mr Engin said.

S&P is also forecasting slower growth in bank deposits.

“This year we will see some weakness in deposits coming from government and the public sector, which is traditionally 30 per cent or more of the total deposit base,” said Mr Engin. “We will see some potential slower growth from the private sector as well.”

Total deposits grew 11 per cent in December year-on-year, Central Bank data showed.

Non-performing loans, which dipped in the past few years, are expected to increase this year because of the weaker economic growth, which may impact the income of corporates. The ratio of non-performing loans to gross loans of S&P rated banks in the UAE fell to 3.5 per cent last year from 3.9 per cent in 2013.

“We can see non-performing loans coming in again because we see deceleration in GDP growth. That will have an impact on cash flow generation ability for certain corporates,” said Mr Engin.

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