Banking sector’s balance sheet remains strong

(AL BAYAN)   

The UAE banking sector continues to be exposed to a long-anticipated downturn in the real estate sector with a 23 per cent exposure in the “personal loans for business and consumption” segment, analysts have warned.

This is despite the fact that mortgages still account for a relatively small part of bank loan portfolios in the country, Kuwait-based Global Investment House said in a report released last week.

UAE banks have benefited from the rapid economic expansion with assets and profits increasing by 43.4 and 23.2  per cent, respectively, in 2007. The return on equity (ROE) at 21 per cent for the year too has improved over the 18.2 per cent reported in the previous year.

The return on assets (ROA) has come down marginally to 2.0 per cent at the end of 2007 from 2.2 per cent recorded in the previous year, the Kuwait-based investment bank said.

The banking sector’s balance sheet continues to remain strong with the regulatory capital-assets ratio (CAR) at 14.23 per cent at the end of September 2007.

“There are also concerns that the UAE banks may be heavily exposed to a long-anticipated downturn in the real estate sector.

“Although mortgages still account for a relatively small part of bank loan portfolios (7.8 per cent at the end of September 2007), the indirect exposure (personal loans for business and consumption purposes comprising 22.7 per cent of the total credit) could be significant,” the report said.

The UAE banking sector continues to grow as a result of the relatively low interest rate environment, high oil prices and a flourishing economy, Global’s analysts wrote.

“The UAE has a remarkably high number of banks to serve a population of around 4.5 million and an economy with an annual GDP of about $190 billion (Dh698bn).

“As of September 2007, UAE had 22 local banks, 27 foreign banks, two specialised banks and around 65 representative offices of other foreign banks.”

The total assets of banks operating in the country have grown by 43.4 per cent to reach Dh1,232.5bn at the end of 2007, against Dh859.6bn at the end of 2006, making it the largest among the GCC countries.

This has come on the back of a strong year-on-year growth of 34.7 per cent reported at the end of 2006. Banking assets have grown at a compound annual growth rate, or CAGR, of 35.4 per cent in the four years from 2003 to 2007.

However, foreign assets of the banking sector witnessed a decline of 1.2 per cent in the first nine months of 2007 after having increased by 32.5 per cent to Dh231.94bn in 2006. Foreign liabilities increased by 37.8 per cent as at the end of September 2007 to reach Dh244.9bn.

“This has come on the back of a massive increase of 108.5 per cent recorded in 2006. As a result, the UAE banking sector has become a net borrower with net foreign liabilities of banks standing at Dh15.6bn as compared to net foreign assets of Dh54.3bn at the end of 2006 and signifies the increased borrowing by UAE banks from the external market,” Global said.

“Banks increasingly relied on foreign borrowing, at longer maturities and lower rates than available in the domestic market, to fund the strong growth of credit. Although potentially increasing their exposure to exchange rate risk, these foreign borrowings have allowed banks to better match the duration of their liabilities and assets, thereby reducing their sensitivity to interest rate risk.”

CLAIMS ON PRIVATE SECTOR

The asset composition of the UAE banking sector is characterised by a high proportion of claims on the private sector and an exceptionally high proportion of foreign assets. Foreign assets, which formed 27 per cent of the total assets at the end of 2006, pertain to the investments made abroad by the government and funded by the banks in UAE.

Most of this exposure is in the form of  bank placements, and a significant portion of it is to top-rated banks in Western OECD countries, Global said. “However, it can be seen that the proportion of foreign assets has come down during the last few years, from 32.7 per cent in 2001 to 27 per cent in 2006 and further down to 21.5 per cent by the end of September 2007.

NATIONAL BANKS DOMINATE

Banks in the UAE primarily belong to two categories, national (local) and foreign, with the latter being restricted from operating no more than eight branches. Currently, there are 49 banks operating in UAE, including branches and offices of foreign banks.

There are 22 national banks and 27 foreign banks operating in the country.  During 2007, the UAE Central Bank granted a licence to Abu Dhabi-based Al Hilal bank, taking the total number of Islamic banks to seven in 2007. The Central Bank also granted operating licences to three Gulf banks in 2007 – Saudi American Bank, Doha Bank and National Bank of Kuwait.

Foreign and national banks are not subject to the same policies regarding taxation. National banks are exempt from tax on operations within the UAE, while foreign banks are subject to a 20 per cent tax.

“Looking at the number of foreign banks, one might feel that the national banks must be having a tough time in sustaining the current position in the UAE market.

“However, it is not the case when we look at the growth composition of the UAE banks balance sheet,” Global said.

“National banks have continued to outperform foreign banks in terms of credit growth in the past three years. It is worth mentioning that the market share of national banks has increased from 78.7 per cent in 2003 to 82  per cent at the end of September 2007, whereas the market share of foreign banks has been declining since 2003 from 21.3 to 18 per cent.

“Moreover, growth in banking assets has been across the board. Based on the performance in the past three years, it could be inferred that foreign banks are yet to exhibit the same levels of aggression as that of the national banks, and have thus not been successful in increasing their market share from the current low base.

“One of the areas where the national banks are focusing now is small to medium enterprise (SME) banking, which is also the way to go about increasing their market share,” the report said.

RAPID CREDIT GROWTH

The surge in banking sector assets has enabled rapid credit expansion to households, corporations and public and quasi-public enterprises. A lot of construction activity is going on in Abu Dhabi and Dubai with mega projects for hotels, apartments, commercial and entertainment properties and infrastructure currently going on, Global said.

“Also, the influx of population due to the booming economy and negative real interest rate environment is driving the credit expansion. Over the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 2001, growth of total credit accelerated in the following two years.  Cashing in on the favourable macro-scenario, total credit increased by 36.1 per cent to Dh537.4bn in 2006, with the credit to residents growing at a slightly lower rate by 34.3 per cent to Dh474.2bn.

The total credit and credit to residents grew further by 20.1 and 22.1 per cent, respectively, in the first nine months of 2007. Likewise, credit extended to non-residents has grown by 51.5 per cent to reach Dh63.26bn at the end of 2006.

“Distribution of credit to residents according to type of facility shows that the increase in credit mainly occurred in loans, advances and overdrafts which increased by 32.6 per cent.

“The bulk of this increase went to the industrial and trading enterprises which increased by 34.2 per cent and formed 56.3 per cent of total loans, advances and overdrafts,” the report said.

Global attributes the growth in credit to residents to the growth in lending to the private sector, as private sector lending contributes 79.8 per cent of the loans and advances to residents.

“Although the contribution has declined from 88.1 per cent in 2001 to 79.8 per cent in 2006, it still plays an important role in driving the credit growth especially in favourable macro-economic conditions.

During the first nine months of 2007, the private sector credit increased by 20.7 per cent to Dh417.6bn compared to Dh345.8bn at the end of 2006, bringing the contribution up to a total 80.8 per cent in terms of credit to residents.”

MORTGAGE LOANS

Mortgaged real estate loans increased substantially at 80.1 per cent in 2006 and further increased to 61.5 per cent in the first nine months of 2007. However, the credit extended to the non-resident sector was moderate with a growth of 5.3 per cent in the first nine months as compared to a growth of 51.5 per cent achieved at the end of 2006. Most economic sectors witnessed an increase in the amounts of bank credit received, with the exception of Agriculture and Mining and Quarrying, which saw a fall at the end of September 2007 after having grown substantially at the end of 2006.  Credit extended to the financial sector saw the highest surge, growing by 62.8 per cent in the first nine months of last year, reaching Dh30.3bn at the end of September 2007.

This was followed by personal loans for consumption, manufacturing, personal loans to SME sector, electricity, gas and water and the construction sector. Credit to government too has grown by 16.7 per cent in the first nine months. The growth reflects the increasing reliance of the government agencies on bank financing, especially for the ‘mega projects’.

Islamic banking surge

Islamic banks have become an increasingly important part of the UAE system. According to the IMF, Islamic banks have increased their share of total bank assets from 8.8 per cent at the end of 2002 to 12.6 per cent at end of 2006 and 14.2 per cent of deposits.

A range of Shariah-compliant products was introduced in the market and Islamic finance deals like Ijara transactions have become common in property purchasing deals.

The region has also witnessed Islamic sukuk attracting large investor volumes. The significance of Islamic banking was further underlined as a few of the major banks started an Islamic banking wing or in some cases converted themselves into Islamic banks.

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