Results a matter of confidence

As second-quarter figures come in, the results so far for publicly listed companies do not bode well. Investors are loath to enter a market they fear has yet to hit bottom, while banks still show a reluctance to lend. The general trend is downward and business is rattled.

The outlook for listed companies for the rest of the year is not bright as the confidence-building positive signs remain difficult to spot.
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Second-quarter results for publicly listed companies in the UAE are almost in. So far, they are not good. About 60 per cent of public companies based in the country, including all of the largest ones, have reported financial results for the second quarter of the year.

Their combined profits came in at Dh6.71 billion (US$1.82bn), down by about 15 per cent compared with the same period last year. Analysts ascribe the poor results to a combination of factors putting stress on businesses. They highlight a sour global economy, banks that are still reluctant to lend and companies that are afraid to invest and move forward with projects because of slack interest from investors, whose confidence has been shaken by the downturn.

"What is happening is investors are not confident that this market is at a bottom," said Nishit Lakhotia, a construction and property analyst at the Bahraini investment bank SICO. "Nobody wants to enter the market right now and I don't see why it should pick up in the fourth quarter. I don't see much confidence coming in this year in Dubai. Unless investor confidence comes in, unless banks start lending more, construction will be down."

The pain is being felt by companies in virtually all sectors represented on the UAE's public markets. With all banks apart from Dubai Islamic Bank reporting, second-quarter profits for the sector have fallen by 25 per cent to Dh3.56bn. Profits at construction and building materials companies have fallen by more than 70 per cent. Etisalat, the largest of the UAE's two telecommunications companies, saw profits decline by 22 per cent compared with the second quarter last year.

Only the UAE's insurance sector has so far seen an increase in second-quarter profits. They have jumped by 6 per cent. But only eight of the 24 listed insurance companies have reported results so far. Property developers have also seen a rise in profits, but only because they climbed back from losses in the second quarter of last year. The decline in profits at Etisalat is "a reflection of the state of the economy", said Simon Simonian, a telecoms analyst at Shuaa Capital.

"The mobile market is approaching saturation [with the average consumer owning about two phones], so you're seeing the maturity of the market combined with the weakness in the local economy." The UAE's banking sector, seen by many as a key determinant of economic fortunes, is also struggling to cope with financial weakness. Loan defaults remain a major drag on profits at banks, which have been aggressively setting aside provisions in anticipation of even more deterioration in their loan books.

Central Bank figures show provisions for non-performing loans at banks rose to Dh36.9bn at the end of June, a jump of 54 per cent from the second quarter last year. While a few banks have reported rising profits for the second quarter - Abu Dhabi Islamic Bank (ADIB) made Dh302 million for the period, up by 56 per cent, and First Gulf Bank saw quarterly profits rise by 1.56 per cent to Dh788m - the general trend has been downward.

Abu Dhabi Commercial Bank reported a loss of Dh531m for the quarter, and Emirates NBD, the country's largest lender, reported a 53 per cent decline in profits to Dh403m. Few analysts expect prospects for banks to improve until next year as continuing uncertainty raises their cost of funds - the interest rates they pay to bring in money for lending - and squeezes margins. Banks are also wrestling with the effects of Dubai World's $23.5bn debt restructuring, for which many lenders have yet to set aside provisions.

Under the restructuring, the government-owned conglomerate proposes to extend $14.1bn of bank debt into new five and eight-year loans, a process that would require banks to book more losses. "We're still in a rising provisioning cycle where [loan] quality continues to deteriorate and that's having an effect on profits," said Murad Ansari, a banking analyst at EFG-Hermes. "It appears most of the banks are not very comfortable with extending loans because of their risk appetite and funding issues that haven't been resolved yet. They key thing is that provisioning continues to be a big weight on earnings. Banks are concentrating more on deposit growth than loan growth."

The results do not bode well for the overall UAE economy, which the IMF expects to grow by 1.3 per cent this year and 3.1 per cent next year. But economists say profits at publicly listed companies across the region do not necessarily reflect underlying economies, as many sectors have companies that have yet to seek listings on local exchanges. The Gulf's state-owned oil companies are also not listed on exchanges; a serious omission in a region where energy is the dominant economic driver.

"The overall economy isn't necessarily represented in a country's stock markets," said Daniel Kaye, of the National Bank of Kuwait. "Oil companies aren't represented, and small and medium-sized enterprises are not represented either. They tend to be quite an important component of any economy." As second-quarter profits falter, investors have also shied away from local markets. The Dubai Financial Market General Index fell by 21.4 per cent during the quarter. Stocks listed on the Abu Dhabi Securities Exchange declined by 12.1 per cent for the period.

Against a backdrop of declining profits and diving stock prices, analysts say the outlook for listed companies in the UAE for the rest of the year is not bright. There are some positive signs, they say, but they are increasingly difficult to spot. "For me the fact that some banks have taken Dubai World provisions points to some reduction in uncertainty," Mr Ansari said. "The biggest uncertainty factor for banks is where provisioning is heading, and the biggest factor in the near term is Dubai World, so the fact that some banks have moved forward in that direction and taken provisioning is something to look at positively."