FGB expects record year despite economic slowdown

FGB’s margins will decrease by 20 to 25 basis points because the bank’s cost of capital is slightly higher than its rivals. Sarah Dea / The National

FGB expects a record year even as the slowing of economic growth threatens to hit margins across the banking sector.

The Abu Dhabi-based bank earned a profit of Dh1.45 billion in the second quarter of this year, up 8 per cent against the Dh1.35bn earned in the same period last year. That slightly exceeded analyst expectations, who on average predicted that FGB would earn Dh1.43bn in profit this quarter.

“They will continue to grow slightly better than the sector, which has always been the case with FGB,” said Aarthi Chandrasekaran, a senior researcher at NBK Capital.

The rise in profit came despite a 2 per cent decline in net interest income, which fell to Dh1.61bn. But operating income from other sources including fee income rose 10 per cent, to Dh735 million, up from Dh641m.

“FGB’s earnings momentum in the first half of 2015 is putting us on the right track to achieving another record year,” said the chief executive Andre Sayegh. “Although we are acutely aware of the headwinds caused by global market turmoil, we remain highly confident about the bank’s consistent ability to turn challenges into opportunities.”

Still, it revised down its forecasts for revenue and profit growth over the next six months. The projections both decreased from double digits to high single digits, Ms Chandrasekaran said.

NBK predicts that FGB's margins will decrease by 20 to 25 basis points because the company's cost of capital is slightly higher than its rivals. FGB has a consumer deposit base of about 20 per cent of its capital, lower than the industry average of 30 per cent

Arqaam Capital, a UAE investment bank, continued to rate the stock at buy, but said that a compression of net income margin and its slower outlook made it less attractive.

“FGB continued the year with strong commercial momentum, above full-year guidance of high single-digit [profit growth], but deposit growth was disappointing,” wrote Jaap Meijer, the head of financial research at Arqaam.

The UAE’s economy has shown signs of slowing in recent months as the low oil price hits spending by government-related entities and the strong dollar eats into foreign investor interest in property.

The IMF has downgraded its forecasts for growth in the UAE’s non-oil sector three times in the past eight months. Meanwhile the Dubai and UAE purchasing managers’ indexes, which measure business activity in the non-oil sector, have suggested slowdowns in business activity. Manufacturing output in Abu Dhabi was also down in the first quarter of the year, according to data from the Statistics Center Abu Dhabi.

Ms Chandrasekaran said that while any economic slowdown would “eventually” hit banks’ bottom lines, the financial sector was unlikely to feel the impact this year.

“There’s always a lag between economic growth and the effect on banks’ bottom lines,” she said, “but we don’t expect that balance sheet growth this year to be significantly different from last year.”

NBK Capital predicts that the UAE’s banking sector will record growth in the “high single digits”.

Shares in FGB, which are traded on the Abu Dhabi Securities Exchange, fell 0.3 per cent to Dh15.45.

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