Opinions divided over rally by UAE lenders

What's Up: Banks take a tumble, but Union National Bank seems poised to benefit from lower bank lending rates and is less exposed to regulations on personal lending than other banks.

The jury is out on whether the UAE's banks can sustain their recent rally as significant uncertainty clouds the sector, but Union National Bank (UNB) seems better positioned than some rivals.

Goldman Sachs and Global Investment House yesterday issued research notes with opposing views of the UAE's banking system. Global gave a thumbs up, Goldman a thumbs down, citing the impact on profits because of Central Bank rules on personal loans. Among the top five UAE banks, UNBderives the lowest proportion of fees from retail loans, according to Global. That limits the extent of a dip in profitability from the Central Bank's recent broadside on retail lending.

Analysts set a lower price target of Dh4.70 per share but maintained their"strong buy" recommendation, saying the stock had plenty of room to grow.

"The return ratios of banks are on an improving trajectory and do not justify the low price multiples that banking stocks are trading at," the report said.

UNB's funding costs are among the highest in the UAE, but as Emirates interbank offered rates (Eibor) fall to new lows it is becoming cheaperfor UNB toborrow money and to pay interest on customers' deposits.

A fall of three-month Eibor to record lows of 1.59 per cent is cause for optimism at UNB, said Shabbir Malik, a financial analyst at EFG-Hermes.

"Banks which have commercial deposits, meaning they don't depend on government deposits to fund their balance sheets, are going to be more favourably affected by lower Eibor," he said.

However, the outcome for the UAE's banks could go either way. "It could be that, given the price run that we've seen in all these banks, maybe the gains are priced in and it's time to take a breather," Mr Malik said. However, Global's report noted that UNB might still have some exposure to corporates undergoing debt restructurings, such as Al Jaber Group and Dubai Group.

The shares fell 2.6 per cent to Dh3.72 per share in trading yesterday, having risen 3.9 per cent since the start of the month.