A very solid performance just the same

The full-year 2009 results reporting season kicked off with much anticipated announcements from the banking sector. It was immediately obvious that, as expected by the market, provisions have made further inroads into the profitability of the UAE's commercial banks.

Numbers announced so far have reported deteriorating asset quality, across the board, and the suspension of margin expansion. Growth in this industry, over the period in review, seems to have been centred largely on spread management and cost control, but by and large it was confirmed that 2009 was not a year conducive to credit growth.

This lacklustre credit activity is clearly visible in the results of the major financial institutions that have announced over the past few weeks.

The banking sector's asset quality is painting a mixed story from results so far. Non-performing loans (NPLs) have jumped from levels generally less than one per cent.

However, from a broader sector view, asset quality has remained fairly resilient and in the case of most other institutions, NPL's remain below two per cent, beating many bearish forecasts.

This is a very solid performance when compared to some financial institutions in other GCC countries. Provisions will continue mounting, however their impact on profitability may start easing in the second half of the year. This is evident in announcements indicating that leading UAE banks' provision coverage is currently above or at 100 per cent.

Credit growth will remain slow in 2010, as banks focus on spread management, asset quality and fee income. On a more encouraging note, the transparency of the UAE's listed banks is improving immensely, which in the long term will garner more confidence in the sector.

In the non-financial services sector, we have seen resilience in profitability and cash flow generation. We continue to believe that during this difficult time, the strongest companies will be those with the most defensive capital structure.

The non-financial services sector is expected to be in the news for the right reasons in the next couple of years. This is as a possibility based on management guidance and industry trends. In telecom, over-penetrated mobile markets and access to cash open up the possibility of acquisitions in other regions. In transport, companies such as Aramex have been on the prowl for attractive targets in Asia, while announcing excellent results achieved through margin expansion. Food and household firms are also making efforts to diversify and make the sector one to watch in 2010.


- The author is Investment Research Analyst, Asset Management, The National Investor. The views expressed are his own

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