UAE banks to remain profitable amid oil price weakness

UAE lenders have also largely cleaned up bad loans dating back from the financial crash of 2008, making them more resilient to any shocks.

Emirates NBD led the sector in the first quarter with earnings of Dh1.67 billion, a 60 per cent year-on-year gain. Pawan Singh / The National

UAE banks are expected to continue giving shareholders something to cheer with their second-quarter results even as the oil rout slows business activity down.

Most of the country’s biggest banks have transformed their business models in the past couple of years to get more money from services that command fees, such as asset management, brokerage and trade finance, rather than relying exclusively on interest from loans, said analysts including Jaap Meijer, the head of financial services research at Arqaam Capital, a Dubai-based investment bank.

Lenders have also largely cleaned up bad loans dating back from the financial crash of 2008, making them more resilient to any shocks.

These precautionary measures have made UAE banks resilient in the past three quarters after the price of oil lost more than half its value. Oil is the key driver of economic growth in the Arabian Gulf.

“We again anticipate a robust quarter,” said Mr Meijer. The “provisioning cycle is fully behind us”, he said, adding that he expected “continued growth in commercial momentum”.

In the first quarter of the year Emirates NBD led the sector with earnings of Dh1.67 billion, a 60 per cent year-on-year gain.

It attributed the growth to ebbing exposure to bad debt from government-related entities in Dubai but also got a boost from fee income and its consumer banking business.

Arqaam expects that the UAE banks that it rates will have a consolidated earnings growth of 15.9 per cent in the second quarter.

Meanwhile, EFG-Hermes, the Egyptian investment bank, is more conservative. It is betting that the income at banks it covers will rise 5 per cent in the second quarter.

Those projections come even as deposits are expected to weaken as government companies that can be relied on to fill bank coffers begin to feel the effects of lower oil prices. As the supply of cash tightens, banks in the UAE and other Gulf countries may start raising interest rates to their corporate customers, the ratings agency Standard & Poor’s said.

The result, however, will not be catastrophic, S&P says. That is because governments in the region have amassed massive cash reserves and continue to invest in infrastructure. There has also been a sharp improvement in property prices. That makes much of the collateral that banks hold more valuable.

Most investment banks watching UAE banks agree even as business production indicators such as the Purchasing Managers Index show slowing growth in recent months for the country’s non-oil private sector.

“UAE’s largely favourable macro backdrop, adequate liquidity in the banking system and low interest rates are tailwinds for banks’ credit quality,” said Elena Sanchez-Cabezudo, a Cairo-based bank analyst at EFG-Hermes.

"A US rate rise is likely to occur towards the end of this year. We believe banks with a relatively high mix of deposits and corporate loans, such as Emirates NBD and Abu Dhabi Commercial Bank, are well positioned to benefit from rising US rates. We like UAE banks for their attractive dividend yield, particularly FGB, ADCB and Dubai Islamic Bank, which offer yields of around 6 per cent."

Most UAE banks came out of the first three months profitable. Concerns that the lower price of oil would dampen profitability proved unfounded, as the country’s economy has shown that it is now not completely reliant on the commodity.

While analysts say it is too early to tell what the longer-term impact lower oil prices will have on the ability of banks to make money, especially if prices remain subdued for a long time, they say that banks have so far been able to weather the storm by generating more money from fees.

As part of that strategy, banks are getting more recurrent income through advisory services, trade finance, capital markets, insurance and brokerage operations.

Because the margins the banks get from loans have become compressed, they are focusing on generating income from parts of their business such as individual customers and small and medium-sized enterprises, where they can charge higher interest rates because of the elevated risk.

Banks have also been expanding abroad to bolster their balance sheets and find new ways to make money as the home market becomes crowded.

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