UAE banks posted a combined net profit of Dh25billion last year, a 28.8 per cent rise from 2006, UAE Central Bank governor said on Monday.
“The future is bright for banking business in the UAE, and economies in the region will grow as demand for oil continues to grow,” Sultan bin Nasser Al Suwaidi said at a conference in Abu Dhabi.
The banks’ combined deposits rose 35 per cent to Dh750bn last year, while assets hit Dh1.24 trillion from Dh852bn, a growth of 45 per cent over 2006, he said.
Total loans and advances grew by 39 per cent last year to Dh725bn from Dh520bn at the end of 2006.
“These figures exhibit a strong banking sector, which is expected to continue to grow at reasonable rates in the future,” said Al Suwaidi.
“The growth will create additional revenues and as a result more investment banking opportunities need to be seized in the future,” said Al Suwaidi.
The announcement comes in the wake of similar reports from investment banks over the last week. Emirates Business reported last week that bank profits were likely to rise due to increasing spreads as lower borrowing costs are not passed on to consumers and corporates.
This year is likely to be a watershed era for the UAE banking sector marked by both expansion and consolidation, according to investment bank EFG-Hermes.
“The banking sector is expected to see expansion and consolidation, with more domestically focused banks looking towards consolidation and larger banks engaging in expansion across the Mena region,” the Cairo-based investment bank had said in its research report.
However, the turmoil in US credit markets may hamper the ability of firms and banks to raise international capital to fund acquisitive growth plans and lending.
A windfall is also in the offing for banks this year with an expected increase in number of public issues. At least nine major IPOs are rumoured to tap the capital market this year.
Among them are Depa United Group, Abu Dhabi Vegetable Oil Company, M’Sharie, Abu Dhabi Securities Market, Dubai Aerospace Enterprise and The National Investor.
The UAE’s move to mirror the Fed interest rate cuts over the last four months has also contributed to the growth in margins for banks.
Consumer and corporate borrowers were unlikely to find cheaper money following the drop in interest rates in the GCC, in sharp contrast to the expected flow of liquidity that is now available in the United States.
“Banks in the region do not immediately pass these cuts on to consumers,” Abdul Kadir Hussain, CEO of Mashreq Capital told Emirates Business. “The mechanism of increased liquidity and money supply is not as automatic as it would be in the United States,” he said.
Morgan Stanley said in a report last week that it was bullish in its outlook for Abu Dhabi banks this year. The Morgan Stanley forecast recommended Abu Dhabi banks as “an inexpensive play on GCC growth”.
Of the three Abu Dhabi banks covered by the investment bank in its report, Morgan’s top pick was First Gulf Bank, with a 26 per cent potential upside and a clear “overweight” rating. The other two banks, Abu Dhabi Commercial Bank and Union National Bank both received ‘equal-weight’ rating with price targets offering about 21 per cent and 17per cent respectively.
“Abu Dhabi banks look set to benefit from the GCC’s current thriving economic cycle,” Tammam El Barbir, Morgan Stanley Banking Analyst for the Middle East and North Africa said in a report titled “Abu Dhabi Banks: Cheap Play on GCC Growth”.
As part of the report, he suggested the factors influencing the upbeat outlook on the sector are the “robust macro outlook leading to strong loan growth”, the “potential for M&A activity” in the region and the fact that “Abu Dhabi banks are trading at attractive valuations relative to both GCC peers and historical multiples”.
Regulatory mechanism in offing
The Central Bank governor said as banks expand their operations, the apex bank will step up regulatory mechanisms to monitor the process. It will also set up a banking supervision and examination department.
The Central Bank Strategy for banks has already been put into implementation at the start of this year, Al Suwaidi said.
He added there are several areas where the banking sector was likely to see improvements this year.
“Business and financial regulations will be reviewed, improved and those that do not exist will be introduced,” said Al Suwaidi.
“Banking supervision and examination will become more robust and more interactive as it will be run under the umbrella of a separate committee within the Central Bank.”
He said the Central bank will provide more IT solutions for banks and other financial institutions operating in the UAE with the aim of helping banks deal with common challenges on a collective basis.
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