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24 April 2024

Banks to show higher profits in 2008

Ziad Dabbas (SUPPLIED)

By Nadim Kawach

UAE banks escaped the debilitating effects of the global financial crisis in 2008 and netted higher profits thr-ough the year despite an expected growth in their asset loss provisions, industry experts said yesterday.

The country's 25 national banks and 28 foreign units earned in excess of Dh20 billion in the first nine months of 2008, an increase of nearly 39 per cent over their earnings in the same period of 2007, the experts said.

Despite slower performance in the last quarter, most banks are expected to announce higher net income for the year but growth in the combined profits is projected to be slower than in 2007, they added.

"Preliminary estimates show that the combined profits of the UAE banks grew by 10-15 per cent in 2008, far slower than in 2007," said Ziad Dabbas, Financial Advisor at the government-controlled National Bank of Abu Dhabi. "Some banks might report lower earnings but the collective profits of the sector are expected to be higher… the slower growth in profits was caused mainly by weaker performance in the last quarter."

Dabbas said many banks had to boost provisions to make up for loss in their overseas assets because of the global financial crisis while others have suffered from a sharp decline in their share prices.

"There was a big decline in the value of assets of many banks in the last quarter while some banks have suffered losses from their investments in global markets, but don't forget that many big banks in the UAE have not reported any losses. This means the banks have achieved higher profits through 2008 and I believe total profits of the sector could be above Dh25bn."

UAE banks netted about Dh24.4bn in 2007, an increase of nearly 23 per cent over their 2006 profits of about Dh19.7bn. The record earnings in 2007 were a result of a sharp growth in their operations in the region amidst an economic and oil boom, a surge in personal loans, and strong demand for credits in the construction and other sectors.

Experts said the banks escaped the global credit crunch because of measures taken by the Central Bank and the Federal Government to offset liquidity shortage by offering Dh120bn in emergency funds for banks in the form of loans and deposits and by guaranteeing deposits for three years.

Besides the global crisis, UAE banks were jolted by the exit of massive funds that had been deposited by international currency speculators in the previous year in anticipation of a Gulf currency appreciation against the US dollar. Bankers estimated more than Dh190bn exited the UAE during 2008.

The shortage prompted UAE banks to sharply cut their deposits with the Central Bank, including certificates of deposits, which plunged from a record Dh185bn at the end of March to only Dh53bn at the end of October. In addition to such funds, UAE banks continued to benefit from the Central Bank's Dh50bn facility to meet credit demand and other commitments although their use of that facility has remained relatively low, not exceeding Dh10bn at the end of October.

Bankers attributed this to the fact that those banks have enough cash and most of them have become more careful in lending as a result of the global financial crisis.

"I agree that many banks resorted to increasing their provisions to offset their losses and the decline in the value of some of their assets. This, of course, will adversely affect their profitability despite their good performance last year," said Humam Al Shamma, an expert at Al Fajr Securities in Abu Dhabi.

"According to initial information, the combined profits of the UAE banks grew by about 5-10 per cent in 2008 and I believe this is a very good result considering the impact of the global financial crisis on banks worldwide."

Central Bank figures showed the UAE banks had steadily increased their provisions against non-performing loans since mid 2007, when they stood at about Dh19.2bn. They swelled to nearly Dh20.9bn at the end of 2007 and peaked at about Dh22bn at the end of June.

The Central Bank has not yet provided data on those provisions and on lending by the banks for the second half but its June figures showed their combined deposits stood at about Dh833bn at the end of June while their credits to residents and non-residents soared to an all time high of Dh889bn, exceeding deposits for the first time by a ratio of 1.06.

The report showed there was a rapid growth in domestic credits in the first half as they jumped by about 24 per cent at the end of June.

Real estate mortgage loans rocketed by about 50 per cent to record one of their highest growth rates in the country's history. From about Dh58.8bn at the end of 2007, they soared to Dh87.5bn at the end of June.

The report showed there was an increase of about Dh10bn in government deposits with banks as they swelled from about Dh114.5bn at the end of 2007 to Dh124.5bn at the end of June 2008.

"As far as I know, all those developments and strong government support in 2008 allowed the UAE banks to have a good year in terms of operations," said Zuhair Kiswani, Director of the Sharjah-based Al Sharhan Securities. "But in terms of net profits, I think they have not been to the expectations of shareholders. Some banks suffered from losses in their investments abroad last year and there was a downward pressure on most sectors in the UAE in the last quarter because of lower oil prices and the credit crunch. My expectations are that the banking sector's profitability could have broken even."