Retail loans, which are growing faster than corporate loans on improving macroeconomic conditions, are expected to boost second-quarter earnings prospects for UAE banks, analysts said.
Sector-wide profit in the first quarter stood at Dh6.13 billion, compared with Dh5.37bn in the year-earlier period.
“Retail growth is really good, although we’re not expecting overall loan growth to be much better than last year, said Aarthi Chandrasekaran, a senior research analyst at NBK Capital.
Last year, the UAE’s economy grew by more than 4 per cent, and the IMF expects growth of 4.5 per cent in 2014. This growth is expected to fuel demand for mortgages, cars and personal financing
Shabbir Malik, an associate vice president at the investment bank EFG-Hermes, said: “Banks will continue to focus on the retail segment, in terms of loans.”
Analysts also expect the reduced price of risk to boost banks’ profitability in the second quarter.
“We expect to see a continued drop in provisioning,” said Mr Malik.
Provisioning refers to setting aside of capital to account for expected losses from a loan book. As the riskiness of a book of assets declines, the amount banks need to set aside also falls.
“The cost of risk is declining at a significant rate,” said Ms Chandrasekaran. “That should lift up the bottom line.”
A rise in mortgage activity accompanying a boom in property prices is providing more business for banks. It is, however, a very small percentage of the loan book, so the extra business is not likely to lift up loans much.
“Seventy per cent of real estate transactions in the UAE are wholly cash-based, so mortgages are not growing at the rate they were in 2007 and 2008,” she said.
Overall, pressure on spreads – the difference between the rate of interest given on deposits and the rate of interest charged on loans – is expected to increase, analysts said.
Banks will reduce spreads, said Mr Malik, because “there’s excess liqudity in the system, interest rates are low, and there is healthy competitive pressure from other banks”.
Eibor, the rate at which the UAE’s banks lend to one another, currently stands at 1.09143 per cent – its lowest level for eight years, the longest period for which data is available.
The estimated hit to banks will be around 0.15 to 0.20 per cent of their profit margins.
But the general picture is bright. “Corporate fundamentals are better than elsewhere in the GCC, to the end of 2014, at least,” Mr Malik said.
And banks are expected to earn a lot from fee income. Volumes on the Dubai Financial Market and the Abu Dhabi Securities Exchange are high, which means there is plenty of brokerage work. A pick-up in merger and acquisitions activity could also be good news for the country’s banks.
In general, “non-interest income growth is better than interest income across the banking sector”, said Ms Chandrasekaran.
Analysts also said that UAE banks are faring better than their regional counterparts.
“If you look at the banking sector in Saudi Arabia and Qatar, you see very lacklustre operational performance in the last quarter of 2013, said Sanyalaksna Manibhandu, the head of research at NBAD. “Banking is something that Dubai and Abu Dhabi can be superior in. The banks here are better than the other banks in Egypt and Gulf – so they will benefit going forward more than other banks.”
Meanwhile, the overall share prices of UAE banks are up 14.46 per cent over the last six months, and up 43.65 per cent over the last year.
abouyamourn@thenational.ae
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