Most UAE banks resilient in the face of oil-price pressure

Mood at banks dim in 2015 as drop in oil slows economic growth and deposits dwindle.

The greatest signs of stress in banking will continue to be in lending to small businesses, analysts say. Mona Al Marzooqi / The National

When the public relations experts do not call you as frequently as they are accustomed to, you know that something is wrong in the beat you are covering as a journalist.

When your inbox is not piling up with press releases about perfumed credit cards or the chance to win a kilo of gold in a monthly halal raffle, you know that all is not well in the world of money lenders seeking their pound of flesh.

The suspicions grow when you phone the public relations expert and the phone just keeps ringing. Or sometimes, more worryingly, it does not ring at all.

The cautious optimism at the start of the year that the drop in oil was just temporary has given away slowly throughout 2015 to the realisation that the drop is deeper than most suspected and business may not be as usual next year.

Since summer last year, the price of crude has slipped by more than 70 per cent, an unwelcome development for the nations of the Arabian Gulf that rely heavily on oil to support economic growth. The UAE, which is the sixth-largest producer of oil in the world, uses revenue from crude sales to fund more than 60 per cent of the Federal budget.

Already, the banks have started to lay people off as the fat of the past few years starts to fizzle. HSBC and Standard Chartered have been terminating contracts because of their global woes as well as local ones. FGB, one of the biggest lenders in Abu Dhabi, laid off at least 100 people in recent months. Chief executives have also started to disappear. United Arab Bank’s Paul Trowbridge resigned shortly after the bank reported a third-quarter loss due to loans that soured.

The Sharjah bank lost Dh272.6 million in the third quarter compared with a profit of Dh169.2m in the same period last year, due to what it said was “a significant increase in loan defaults in UAB’s higher-risk commercial loan portfolio”, which is code for small and medium-sized enterprises.

That does not mean it has been a bad year for banks. Most lenders remain extremely profitable and the UAE has been, thus far, more resilient than many of its neighbours. Many predictions are holding out.

“It’s a fact that the price of oil has dropped,” Andre Sayegh, the chief executive of FGB, told The National in April.

“Is it the end of the world? No. There is volatility. Historically there is volatility, and volatility will continue. The UAE is one of the countries that are very well positioned to overcome the drop in oil for many reasons.”

By and large, that has remained the case and so far banks are by and large shrugging off the drop in oil. In the first nine months of this year, FGB reported a 4 per cent increase in profits to Dh4.28 billion, compared with Dh4.10bn in the same period last year. National Bank of Abu Dhabi, the biggest bank by assets in the UAE, and Emirates NBD, Dubai’s biggest bank, have also held their ground.

Still, everything is not as cheery as bank executives can sometimes make us believe. The Central Bank sprayed some reviving sobriety over the heated optimism of some at the end of October when it said that banks are becoming increasingly risk averse when weighing loans to businesses.

To be fair, bank chiefs have also become more circumspect as the year has worn on. As a result of the expected slowdown in government spending, some bank chiefs expect loan growth to cool next year as economic growth begins to slow and banks become more conservative when choosing who to give loans to.

Alex Thursby, the chief executive of NBAD, said at the end of October in an interview with The National that he expected UAE loan growth to be about 5 per cent next year, nearly half the expansion rate over the past few years. Mr Thursby said UAE banks had lost more than US$15bn in government deposits from September last year, when the drop in oil price began to accelerate.

The greatest signs of stress in banking will continue to be in lending to small businesses, analysts say. Lending to small and medium-sized sectors is a risky endeavour at the best of times as small companies are inherently risky. Their managers often have little experience and face difficulty when they try to break into fields that are often dominated by bigger fish.

Small businesses have faced the brunt of this year’s headwinds and are likely continue to do so as it is becoming costlier to borrow and the pool of cash the banks have at their disposal is likely to contract more. Interest rates were going up way before the US Federal Reserve raised its rate by a quarter of a per cent point as the money circulating in the banking system got tighter.

And looking into next year, rising rates may not be good for an economy that is starting to cool. That may not be good for banks either.

“While in the past we have maintained a positive bias towards banks in a rising interest rate environment, the current macro environment raises risks that could offset the positive impact of a rate hike, in our view,” according to analysts led by Murad Ansari at EFG-Hermes, the Egyptian investment bank.

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