Profitability expected to continue in 2008

(PATRICK CASTILLO)   

Most banks in the UAE showed positive results during 2007, reflecting only slight exposure to the US sub-prime crisis. Writing off bad debt was limited and experts agreed there was strong potential for the UAE banking sector to expand and make gains this year.

 

However, other factors such as regional stock market instability and weakness could prove challenging for the sector, analysts warned.

 

Islamic banking and real estate opportunities are expected to boost business in the already strong UAE banking sector in 2008, according to analysts. They also agreed that most UAE banks are shielded from the sub-prime crisis, which has rocked the international financial sector.

“The UAE banks are only slightly exposed to the crisis. It hit only international banks working in the country, while there is very slight correlation between local banks and US banks,” Asim Khan, director of structured solutions at Trust Securities, told Emirates Business.

 

“According to statistics, last year more than 90 per cent of the United Kingdom’s population was mortgaged compared to only seven per cent in the UAE. The mortgage market here is still below most developed countries. There are strict rules to process mortgages in the UAE compared to very easy procedures in the West. This shows that UAE banks are shielded from the sub-prime crisis,” he added.

 

Khan said that demand for mortgages is on the rise in the UAE due to the expanding number of real estate projects and he predicted it would have a positive impact on the banking business, contrary to the situation in US banks.

 

Nadine Wehbe, senior market analyst at Orion Brokers, agreed with the assessment: “Disruptions in global financial markets have not had spillover effects on the UAE economy. UAE banks had only marginal exposure to the sub-prime mortgages and the credit crisis will not have a significant impact.”

 

Despite the initial surge in Dubai Financial Market on Monday, the banking sector was the major loser.

 

“There is panic in the market. We already saw a big fall in the stock market and then a big correction. The market was down around 15 per cent and then upward 10 per cent. The overall loses counted for around five per cent. This will have a slight impact on banks’ earnings,” said Khan.

 

He added that interest rate cuts would create more lending opportunities for banks. “I think the local markets should go towards alternatives and derivatives to create investment channels for increasing liquidity. Creating more investment channels will help banks introduce more credit for their clients, individuals or corporate,” he said.

 

However, not everyone thought the outlook was as bright. Sherif Sanad, institutional desk manager at GFS Investments, said the composite UAE index lost 42 per cent of its value in 2006, compared to a jump of 100 per cent in the preceding two years.

 

“Market decline was motivated by the undoing of unsustainably high valuations amid concern for earnings quality, rising interest rates and negative regional contagion. That is why I believe that UAE banks will get affected negatively. As the global market is struggling since last month, along with strong decisions which are impacting directly the forex market, including: interest rate cuts, Iran’s decision not to peg crude oil to the dollar anymore, and mortgage crisis in US.

 

All of these events are impacting badly on the global market, and of course it will have a bad impact on local and international banks in UAE as the UAE economy is based on the dollar, that is why the inflation rates has been increased in most GCC countries.”

 

Sanad said inflation rates in Qatar stood at 14.81 per cent last March. UAE inflation surged to a 19-year high of 9.3 per cent last year. Oman, where inflation almost hit six per cent in July, sets its interest rates in a weekly auction. Kuwait left the benchmark discount rate unchanged at 6.25 per cent.

 

Sanad added: “For the long-term vision, I believe that these factors will affect banks’ performance in the country as the UAE economy is pegged with the dollar and that is why we can expect UAE banks will record less profit in 2008.”

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