Bearish economic climate to drag down Islamic banks’ profits, S&P warns

Property prices in Dubai’s Marina district have plummeted about 18 per cent over the past three months, according to Dubizzle. Antonie Robertson / The National

Low oil prices and slower economic growth will hit the earnings growth of Islamic banks in the Arabian Gulf this year and next, says Standard & Poor’s.

Earnings growth would fall to “mid-single digits” in 2015 and 2016, said the credit ratings agency yesterday, down from the sector’s average earnings growth of 12.7 per cent last year.

It said the value of collateral assets held by Islamic banks had been hit by government-related entities’ declining appetite for capital expenditure amid lower government spending, economic growth and the falling value of Dubai properties.

These trends would also bolster non-performing Islamic assets over the next few years, said S&P.

“With revenue from crude oil depressed, and likely to stay depressed, financing activity should go down across the board,” said Sanyalaksna Manibhandu, a senior analyst at the National Bank of Abu Dhabi.

“That doesn’t just apply to the real estate market, everything will go down because consumers and businesses have less demand for loans and less income.”

Islamic banks in the UAE are more exposed to real estate than their conventional counterparts. Sharia principles require all transactions to be based on the exchange of real assets, and real estate is commonly used as a form of collateral by customers of Islamic banks.

Property prices in Dubai’s Marina district have plummeted about 18 per cent over the past three months, according to Dubizzle. Rents in the same area have fallen about 7 per cent. Across Dubai, transactions plunged 69 per cent in the second quarter from the same period last year, according to data from Dubai Land Department.

That follows government moves to cool the housing market with an increased tax on house purchases, and limits to the size of a mortgage that bank customers can take out.

A slowdown in oil and gas projects is also likely to hamper credit growth at Islamic banks. S&P forecasts that the UAE’s Islamic lenders will experience an 8 per cent increase in credit this year and next, down from 9.5 per cent last year and 8.8 per cent in 2013.

A worsening macroeconomic picture underpins much of the gloom. The IMF now projects a 3 per cent GDP growth for the UAE this year, down from its forecast last December of 4.5 per cent growth. That is because government spending cuts will cut economic growth by 1 per cent each year to 2020, and the low oil price is affecting consumer demand.

One analyst said government deposits at banks were beginning to decrease, as the macroeconomic environment worsens.

“2016 will be more challenging because everyone’s factoring in a lower oil price for a longer period. That means that government spending, corporate spending and capex are likely to slow down,” said the analyst.

S&P studied a sample of 17 Islamic banks in the Arabian Gulf.

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