Samba predicts mergers in banking sector to offset crisis

UAE banks could be forced to embark on mergers this year to escape the adverse effects of a sharp slowdown in the domestic economy and the global credit crunch, a key Saudi bank and economists said yesterday.

A steep fall in fourth quarter profits by most banks that have released financial results for 2008 signalled a tough year ahead and this should prompt further support by the UAE Government, the Saudi American Bank (Samba) said.

In a study sent to Emirates Business, Samba said that despite recent cash injections by the government into some banks and other measures, UAE bank credit growth is projected to sharply slow down this year as many of them are concerned about asset quality in a slowing economic environment while others are streamlining lending activities and striving to boost deposits.

"Bank results for 2008 were generally positive but most of the banks saw sharp drops in the fourth quarter. To date, banks in the UAE have been resilient in the face of the international credit turmoil and the US subprime crisis. There have been no bank failures, although the country's two largest mortgage finance companies, Amlak and Tamweel, have been merged and effectively taken over by the federal government," the study said.

It said that available bank results for 2008 show that profits held up for the year as a whole, and in some cases posted impressive gains.

Capital adequacy ratios also remained relatively healthy and above the required 10 per cent, although they have continued to fall.

"However, most fourth quarter 2008 profits were sharply lower and offer a foretaste of the difficulties to come… Banks face a tougher time in 2009 in the face of lower oil prices, weak stock markets, falling real estate prices, reduced access to capital markets, and the broad economic slowdown," Samba said.

It noted that in such circumstances, the banks face significant risks from asset quality deterioration, rising non-performing loans, inflated provisioning needs and decreased credit volumes.

Reflecting the deteriorated operating conditions, international rating agencies have recently moved to downgrade the individual ratings of a number of UAE banks, although they have been quick to stress that the Long-Term Issuer Default ratings are unlikely to change as they remain driven by the probability of support by the federal government.

"Given the tough outlook, further such support may be necessary, and there may also be scope for consolidation in the banking sector. Currently there are more than 50 domestic and international banks, many of them government controlled," it said.

In recent comments, UAE Central Bank Governor Sultan bin Nassir Al Suwaidi urged the country's 24 national banks and 28 foreign units to consider merger to strengthen their financial position and face the current financial crisis.

Suwaidi, himself a veteran in banking mergers in the UAE, said the Central Bank would continue to encourage mergers as a means to create strong financial entities and face possible fallouts of the global crisis.

"The UAE banking sector has had a successful experience in mergers when some banks united during the bad debt crisis in the 1980s," said an economist at an Abu Dhabi bank.

"I think it is the right time now to consider more mergers in the sector and I feel there will be such moves this year or next year," he added.

According to Samba, UAE bank credit growth hit a record high in the first half of 2008 but it set for a sharp slowdown this year due to tight global credit conditions, low deposits and Central Bank curbs on lending.

"Despite the measures taken by the authorities, the recent rapid rate of credit growth will slow sharply as a result of tighter liquidity conditions….the Central Bank has also set a cap of 10 per cent lending growth for 2009, although this may not be necessary given that, without access to wholesale funding, many banks may need to deleverage their balance sheets," it said.

"As well as high loans to deposit ratios, banks are also concerned about asset quality as the economy slows and real estate prices fall. Many are streamlining their lending operations and pursuing measures to boost their deposit base."

It said UAE banks were still offering higher interest rates to attract more deposits after a steady growth in their deposit-to-loan gap.

"UAE banks are now offering up to seven per cent on time deposits compared with two per cent a few months ago, as they try to boost their deposit base."

Despite higher rates, Central Bank figures showed the combined deposits with the UAE banks declined for the first time in many months to Dh905.7 billion at the end of January from Dh922.5bn at the end of 2008.

The decline depressed the banks' total assets for the first time in two years to around Dh1,466.5bn from Dh1,480.5bn. Despite the fall, UAE banks remained in control of the largest assets in the Arab banking sector.

In contrast, loans and advances maintained their steady growth to peak at nearly Dh1,022bn compared with Dh1,018bn in the same period.

The figures showed provisions for non-performing loans have also recorded steady growth over the past year to reach Dh26.3bn at the end of January compared with Dh24.9bn at the end of December 2008.

The banks' capital adequacy stood at 13.4 per cent at the end of January, up from 13 per cent in September but down from 14.1 per cent in March 2008.

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