News

Banks saddled with weak loans

By Vicky Kapur Published: 2011-11-01T07:21:00+04:00

A sharp decline in interbank rates in the second quarter of 2011 positively impacted the net interest income of UAE banks in the third quarter, but weak loan growth and higher levels of non-performing loans are weighing in on any future upgrades of UAE banks, UAE’s Rasmala Investment Bank said on Tuesday in a note to investors.

“Lack of balance sheet growth and higher guidance on 2012 provisioning is likely to pressure longer-term numbers,” analyst Raj Madha wrote in the note on UAE banks.

According to central Bank data, UAE bank lending rose by a mere Dh36.7 billion, or 3.5 per cent, in the 12-month period between September 2010 and September 2011, to Dh1.075 trillion. In the same period, specific provisions for non-performing loans (NPLs) rose by a massive 33.33 per cent to Dh50.4 billion, clearly showing that banks’ balance-sheets remain constrained.
Total bank assets (net of provisions) were only slightly better, gaining 5.5 per cent while deposits were also up by roughly the same margin, 5.3 per cent to Dh1.07 trillion in the 12-month period ended September 30, 2011, according to Central Bank statistics.

“Although the net interest income was strong, rising 28 per cent quarter-on-quarter at ADCB, 13 per cent qoq at Emirates NBD and 11 per cent qoq at FGB, we believe this was mainly due to a sharp decline in interbank rates in 2Q11 that affected liabilities yields in 3Q11, but impacted asset yields mostly in 4Q11,” Madha wrote.

“Eibor rates declined substantially in 2Q11, having a positive impact on shorter-term liability rates, with asset rates coming down more slowly,” he elaborated.

“We believe that deferred interest income was booked from interest in suspense, further boosting the results of ADCB in particular. On a recurring basis, the lack of volume growth is likely to mean relatively low net interest income improvements,” the investment bank said.

He added that such gains were unlikely to be replicated in the longer term, resulting in weaker outlook for the country’s banks in general. “Going forward, we expect most issues relating to Eibor pricing to run their course within one to two quarters, and the same can be said for interest in suspense. As a result, banks that failed to benefit should see the performance differential fall,” said Madha.

“Competition and regulation are, of course, less likely to normalise, in our view, and that might mean the negative asset yield impacts would be more lasting than the positives. Indeed, liability yields have been increasing since October 3, 2011, albeit only to the tune of 3.75bp,” he pointed out.

“As a result, although there was a substantial variance in performance caused by margin movements this quarter, we expect this to phase out over coming quarters.”

Rasmala also noted that the balance-sheet growth among the country’s banks was conspicuous by its absence, further clouding the outlook. “System growth has remained stuck in the mid-single digit annual level for some time. Public sector growth is positive, but there are a few other areas where green shoots are apparent,” the bank said.

“Going into 2012, we are less positive, with likely negative revisions to growth forecasts, and a higher level of recurring provisions,” the bank noted. “We also believe we will not see the benefit of falling Eibor rates again, and the likelihood is that the next significant move will be upwards, although we do not expect that to happen in 2012,” it concluded.