Bank measures will begin to pay off in Q3

Banks may be taking every possible measure to set their house in order but the sector would continue grappling with the challenges facing the global economy and the end of the first quarter may be too early to expect positive results, say financial analysts.

The measures taken by the banking sector in the UAE, including stringent lending norms in order to balance advances to deposit ratio, are likely to bear fruit only by the end of the first half or the third quarter of 2009, according to analysts.

As annual results of most banks reflected a clear strain on profits due to the economic crisis, many are pinning hopes on the results of the first quarter now.

"In this quarter, banks are expected to create heavy provisions. Even as the UAE may not get as badly hit, we might see banks making high provisions in 2009 just to help them sustain any asset quality deterioration. The banks are trying to make a safety net for themselves so that in case things go awry they can provide for it in a timely and positive manner. Things may not improve at the end of the first quarter itself. They might start getting positive from the third or fourth quarter of this year as all the measures being adopted now would take a little time to show positive results," said Naveed Ahmed, a financial analyst at Global Investment House.

The banking sector came under severe strain due to the global economic crisis, particularly in the last quarter of 2008. Even as results for the first three quarters of 2008 were positive, the last quarter was badly hit.

"Q408 results have been negatively impacted by high impairment charges on loans, as some banks have taken general provisions as a prudent measure, and also by losses from investments given the continuing volatility in regional stock markets and adverse conditions for alternative investments like hedge funds," said Yousuf Khan, an analyst at Fitch Ratings.

Investment decisions of banks during the boom period with focus on specific segments such as real estate have been stressing balance sheets due to the steep decline in asset values.

"Real estate prices are likely to remain one of the big issues. Banks that have a lot of real estate exposure may take another beating in 2009," said Ahmed.

Analysts said banks are likely to continue grappling with more challenges this quarter too.

"There are many challenges for banks that are different from Q4 2008. New regulations by the Central Bank about growth rate of lending activities for instance, would reflect on financial statements. Revenues would be lower from lending. At the same time banks are facing trouble due to repayment issues and low deposits," said El Hassan A Baker, a financial analyst.

"A lot of people have lost their jobs. It would reflect on financial results.

"Asset valuations this quarter would be another critical issue. The first quarter would see banks continue to face challenges. We will have to wait until the second quarter so that we can see the effect of positive changes to come into play," he added.

Banks would require higher provisions amid deteriorating asset values, the analysts said.

"The first quarter of 2009 could be better than the last quarter of 2008 for banks due to lower impairment charges but there will be other pressures on profitability."

"Profitability in Q1 2009 is expected to remain under pressure from a more challenging operating environment. Some banks are expected to require more provisions as asset quality deteriorates in this scenario.

"Presently there is stress on liquidity in the banking system and this will curb lending. UAE banks recorded rapid loan growth in the last couple of years but the concern is that any bad lending decisions would have been made during the period of high lending," said Khan.

New regulations aimed at plugging the loopholes and fresh measures by banks started last year itself. According to analysts, these measures would contribute towards improving the loan book quality and better balance sheets.

"There has been a risk aversion and an encouragement for banks to be more cautious in the present distressed economic environment where you see asset quality gone down and non performance loans up. It is something that comes in any crisis," says Philippe Dauba-Pantanacce of Standard Chartered.

However, the measures may not show instant results and it could only be by the end of the first half or third quarter of this year that the banking sector can expect to look up, the analysts said.

Analysts said that they expect to see full financial statements for all UAE banks in March 2009, when the full impact of the more challenging operating environment will be clearer.

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