Here's Why Lenders in the U.A.E. Are Upbeat About Growth in 2018

  • Lending seen growing by about 4-6 percent as economy improves
  • Competition for loans, higher provisions may impact earnings

 

 

Photographer: Razan Alzayani

Banks in the United Arab Emirates are upbeat about 2018 with faster economic growth and higher interest rates set to boost earnings.

Banks are expected to raise lending by about 4 percent to 6 percent this year as Dubai prepares to host the Expo 2020. Interest rate increases by the Federal Reserve, which is shadowed by Gulf central banks, will also allow banks to raise loan pricing and improve net interest margins.

“Banks should do better because quality loan demand should pick up,” said Sanyalak Manibhandu, head of research at Abu Dhabi-based FAB Securities LLC. U.A.E. economic growth will recover after decelerating for the past three years due to higher oil prices, he said.

Full-year results for those U.A.E. lenders that have reported have mostly beaten analyst estimates. Still, competition to win loan deals and higher provisions could weigh on earnings.

Banks' Profit

U.A.E. banks should benefit from faster economic growth, interest rate hikes

Source: Bloomberg

Loan Growth

Economic growth is expected to accelerate to 3 percent this year from an estimated 1.8 percent in 2017, according to the mean estimate of 13 economists compiled by Bloomberg. The recovery in oil prices will allow the government to restart delayed projects and may persuade companies to increase investments, all of which will need financing, according to Manibhandu.

First Abu Dhabi Bank PJSC expects its loan book to grow by a mid-single digit percent this year compared with a 1 percent decline in 2017. Dubai’s biggest lender Emirates NBD PJSC also sees a mid-single digit percentage growth compared with a 5 percent increase in 2017. Dubai Islamic Bank expects loans to expand between 10 percent and 15 percent.

Bad Loans

Slower economic growth since 2014 and lower commodity prices led to a surge in loan defaults, with problem loans peaking in 2016. Still, provisions for bad loans climbed to 5.3 percent of gross credit at the end of November, from 5.1 percent a year earlier, according to central bank data.

Provisions at some banks could rise with the implementation of new IFRS 9 accounting rules from this year where lenders have to provide for losses on loans that are expected to turn bad instead of when they actually do, according to Manibhandu at FAB Securities.

“There are no signs so far to suggest that credit quality could deteriorate in 2018,” said Shabbir Malik, a Dubai-based analyst at EFG-Hermes Holding SAE. “The macro-economic environment is largely favorable and some of the stresses that we have seen in small and medium enterprise and retail loans have already peaked or started to come down.”

Net Interest Margins

Most U.A.E. banks expect stable or better net interest margins -- the difference between what banks earn on assets and pay on liabilities and customer deposits -- this year amid three projected interest rate hikes in the U.S. Still, some of these gains on margins could be squeezed as banks lower pricing on loans for borrowers to win deals, according to Malik at EFG-Hermes.

Emirates NBD sees its net interest margin to improving to between 2.55 percent and 2.65 percent, up from 2.47 percent in 2017. Dubai Islamic Bank projects that its will stabilize between 3 percent and 3.15 percent, compared with 3.11 percent last year.

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