UAE bank profits projected to soar 18%

UAE banks are expected to rebound into profit growth of 18 per cent in 2010 after going through one of their worst phases because of the global economic crisis and regional debt default problems, a Kuwait bank said yesterday.

Global Investment House also quoted UAE bankers as saying that they expected new regulations by the Central Bank on provisioning and lending by the country's 24 national banks and 28 foreign units this year.

In a 70-page report on the UAE banking sector, sent to Emirates Business, the Kuwait investment bank said a return to profits by two of the UAE's largest lenders would boost the net income of the banking sector through 2010.

"Keeping a realistic view, we believe that UAE banks will be able to muster up a growth of 18 per cent in 2010, despite a slowdown in the topline. Profits are expected to follow a stronger trajectory going beyond 2010, exhibiting a four-year CAGR of 26 per cent," the study said.

The report noted that UAE banks were hit hard by the global crisis and regional default problems with their net earnings diving by nearly 21 per cent after they were forced to sharply expand their loan loss provisions.

"Despite the challenging environment, the banks' topline (net interest income) still grew by a staggering 26 per cent year-on-year, indicating that troubles were dominantly asset quality related," Global said in its study on the country's banking system, the largest in the Arab world by assets.

Global said its forecasts about a sharp rise in collective profits by UAE banks this year were based on the fact that the government-controlled Abu Dhabi Commercial Bank (ADCB) is projected to return to profits during 2010 after suffering from heavy losses in 2009. It also predicted the Abu Dhabi Islamic Bank would achieve good results after a 91 per cent fall in profitability.

The report said profit growth for UAE banks this year could be nine per cent if ADCB is excluded and only around two per cent without ADCB and ADIB.

"Adjusting for outliers reduces aggregate profit growth forecast to two per cent, which is still a positive indicator for the banking sector. Expectations regarding ADCB and ADIB lend further support to our understanding that profitability growth seems to have touched bottom in 2009."

Balance sheets showed UAE banks' net income stood at around Dh14.8 billion in 2009, far lower than the 2008 profits of Dh18.7bn in 2008. Analysts have attributed the sharp fall mainly to a surge in the banks' non-performing loan provisions, which climbed to a record Dh12.9bn through 2009 because of deteriorating asset quality and default exposures.

Banks began to show improvement in the first quarter of 2010, with the aggregate net earnings of 14 national lenders releasing their results recovering slightly to around Dh4.955bn from Dh4.916bn in the first quarter of 2009. Growth was much higher when compared to the fourth quarter of 2009, one of the worst periods for banks in several years.

Global said it expected new regulations by the Central Bank this year to cap an extensive series of rules it had issued since the eruption of the crisis.

"The UAE banking sector is susceptible to expected changes in regulations pertaining to non-performing loans and general provisions, implemented by the Central Bank. We believe that there is a high likelihood of the following changes being implemented by the Central Bank…"

- Banks will be required to maintain a collective provisioning of 1.25 per cent of RWAs (risk-weighted assets). Our discussion with UAE bankers leads us to believe that it could also be 1.25 per cent of gross loans or 1.25 per cent of gross loans (less sovereign loans)

- Banks will be required to consider loans that have repayment or interest pending for more than 90 days as non-performing, as against 180 days previously. Currently some banks have voluntarily adhered to this norm, while others have only implemented this only on corporate loans

According to the report, UAE banks' assets are not expected to sharply increase through 2010 after modest growth rates over the past year. But it added that assets could start to pick up as the government is expected to boost deposits with local banks on the back of strong oil prices.

Follow Emirates 24|7 on Google News.