Analysts predict record earnings on the horizon for UAE banks

UAE banks loan books expected to boom in fourth quarter amid Expo 2020 project financing and economic resurgence.

Analysts estimate that National Bank of Abu Dhabi may report earnings of Dh1.34 billion in the three months ending September. Silvia Razgova / The National

UAE banks are expected to end the year on a high note, with lending anticipated to pick up as the government boosts spending on infrastructure for Expo 2020, analysts said.

“Next year we should see a pick-up in loan growth because of Expo 2020 projects,” said Simon Kitchen, a strategist at the Cairo-based investment bank EFG Hermes. “You also have more restructuring of Dubai Inc debt, and that may be positive for provisioning levels decreasing towards the end of this year or next year.”

During the penultimate quarter business typically slows down in the UAE because of summer holidays and Ramadan.

The banks have ridden an economic revival that picked up speed last year when growth exceeded 4 per cent after the years of languor that followed Dubai’s 2009 debt crisis. At the same time, competition for retail customers, called so to differentiate them from corporate clients, has become especially fierce in a country where more than 50 banks serve nine million people.

Bank earnings surprised analysts in the second quarter of this year. This is because they came not only from the ability of banks to sell more loans to individuals, where the margins are higher because of increased risk, as well as corporations but also through efforts to diversify income away from loans.

While banks are flush with cash, so too are companies after a year of either refinancing existing debt or taking out fresh loans to fund expansion.

It is expected, however, that government-related entities involved in megaprojects ahead of Expo 2020 will tap banks for financing big time next year. At least Dh30 billion of funding is needed to build infrastructure such as trams and trains, government officials have said.

Dubai clinched the right to hold Expo 2020, a massive exhibition that shows off global innovation, last November. The typewriter, ketchup and the ice-cream cone have been among inventions revealed at previous exhibitions, which attract hordes of global visitors.

The-departure last month of the long serving Central Bank governor, Sultan Al Suwaidi, is not considered an immediate catalyst for a shake-up in the banking industry and most observers see business as usual for the time being. Mr Al Suwaidi has been replaced by Mubarak Al Mansouri, the chief executive of Emirates Investment Authority, a sovereign wealth fund.

“The changing of the Central Bank governor won’t have any impact on bank earnings in the short term,” Mr Kitchen said.

And even though analysts are expecting a slowdown in lending during the third quarter, that has not stopped them from forecasting record quarterly earnings for most banks as provisions, or the amount of money banks put aside for bad loans, decrease and banks get fees from other services such as asset management and export financing.

According to three securities analysts polled by Bloomberg, National Bank of Abu Dhabi, the UAE's second-biggest bank by market value, may report earnings of Dh1.34 billion in the three months ending September while FGB, the country's biggest listed lender by market capitalisation, could report a profit Dh1.36bn.

“The third and fourth quarters will probably be a continuation of what we’ve seen in the first half,” said Taher Safieddine, an analyst at the Dubai-based investment bank Shuaa Capital.

“Definitely it’s a better picture year-over-year. Banks are in better shape, more solid balance sheets, the economy is recovering and the asset quality picture is getting better, so definitely we will see lower provisions year-over-year across the board, and this will definitely support profitability.

“The fourth quarter usually is an interesting quarter,” said Mr Safieddine. “It’s the closing of the year. Activity usually picks up from the third quarter, which was a bit slow. We had Ramadan, we had Eid, we had summer. The fourth quarter is more active.”

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