Analysts waiting for Q3 results

Analysts will look to see whether loan growth has slowed or bank deposits have shrunk during the crisis.

With the majority of banks in the country expected to release their third quarter earnings next week, analysts are hoping to learn how exactly the global credit crunch has affected the local banking system. So far, only Union National Bank (UNB) and Commercial Bank of Dubai have released statements, with both reporting healthy profits. However, analysts are still awaiting news from the larger banks to see whether the recent financial turmoil has significantly slowed loan growth or reduced bank deposits.

Although banks will likely continue to show considerable profits during the third quarter, analysts will be paying more attention to banks' balance sheets this quarter, according to Emmanuel Volland, an analyst at Standard and Poor's (S&P's), a rating agency. For local banks, "one of the challenges is going to be increasing their core customer deposits", along with reining in loan growth, he said.

On Monday, UNB was the first Abu Dhabi-based bank to release its earnings. It reported Dh581 million (US$158.2m) in net income during the third quarter, up from Dh424m in the previous quarter and surpassing predictions. Although UNB's net profit for the period was more than double the same period last year, customer deposits fell from Dh47.7 billion in June to Dh43.9bn. The share price of UNB rose on the news, climbing from Dh4.46 to Dh4.83 on Wednesday.

The Commercial Bank of Dubai also released a profit report on Wednesday, announcing a 19 per cent rise in third quarter profit. Loans and advances increased 59 per cent compared with the same period last year, while customer deposits were up 41 per cent. Western banks have begun releasing their third quarter reports as well, posting much more serious losses than the UAE banks. Merrill Lynch announced a loss of US$7.5bn yesterday, worse than analysts expected.

"Though you won't find all the answers in the third quarter, there might be some signs that loan growth is slowing down, funding is getting a bit tighter, there will be negative investment valuations," said Robert Thursfield, the director of financial institutions at Fitch Ratings. In the past year, loan growth in the UAE has expanded rapidly, making it the only national banking sector in the GCC whose loans exceeded its deposits as of June 30. The pace of loan growth accelerated in the first half of this year to an increase of about 50 per cent annually, according to a report by S&P's.

From July to the end of last month, the local banking system underwent a series of shocks that prompted the Government to take extraordinary measures to support it. Foreign investors withdrew billions of dirhams of speculative "hot money" from the banking system, while at the same time foreign lenders suddenly stopped extending credit. In response to these shocks, the Central Bank last month created a Dh50bn emergency lending facility, followed by a series of other steps taken this week, including insuring deposits and transfers between local banks, and promising to inject an additional Dh70bn into the local system.

However, the Government's efforts have been unable to lower the Emirates interbank offer rate (Eibor) to normal levels. Although the Eibor fell slightly yesterday to 4.57, it still remains nearly twice as high as it was in June. Credit default swaps (CDS) for debt issued by banks have climbed significantly since the credit crunch hit the UAE, indicating investors are betting the banks are more likely to default on their debt. CDS for Emirates Bank International and Mashreqbank nearly doubled last month, although they fell slightly following the government measures taken this week. [e-mail]