UAE Banking Sector
Visible improvement in global and regional financial outlook The global financial scene has lately shown signs of improvement, thanks to unprecedented measures by governments and central banks. Stock markets have rallied, credit spreads fallen, liquidity improved, credit has started to flow in the economy (albeit at a slower pace), business confidence is recovering, and commodity prices have risen. Against this backdrop, the GCC’s economic fundamentals have also responded positively with credit spreads on Abu Dhabi and Qatar’s 10-year sovereign bonds declining by 148 and 132 bps respectively since their launch in April 09, and domestic liquidity improving with 3M EIBOR declining from 4.79% on October 08 to the current 2.45%. Additionally, oil prices have almost doubled from their lows, while some UAE and Qatari companies have successfully raised funds from the international markets. Profitability trend sustained during 2Q09 UAE banks have been able to largely sustain the strong profitability trend during 2Q09. Overall, net profit of the four banks covered in this report is down by 9% in 2Q09 compared to 1Q09 but up 128% from 4Q08 levels. On a YoY basis, the 1H09 profits are down by only 13% from 1H08 levels. The major factor behind the smaller decline in net profits, despite a 316% YoY rise in provisioning, is a sharp increase in Net Interest income (NII). Overall NII increased by 39% YoY, translating into additional income of AED 2.4bn YoY. This incremental NII compares favourably with the incremental provision of AED 1.9bn YoY during 1H09, thereby having a net positive impact on the profitability of UAE banks. Additionally, banks (such as ENBD) have also seen appreciation in their investment portfolios in 2Q09 (with the improvement in global and regional financial markets) and thus have been able to reverse some losses booked during the past 3-4 quarters. Lending practices and loan quality not as bad as widely believed Our management meetings with UAE banks lead us to believe that lending practices and loan quality of banks is not as bad as widely believed. The retail loan portfolio for Abu Dhabi banks (FGB, UNB, and NBAD) comprises 70-80% exposure to UAE nationals, which we consider significantly less risky than similar loans to expatriates. Of the real estate loans, an estimated 50-60% went to government-backed developers, which bear relatively lower credit risk compared to private sector developers, due to their stable financial position and strong possibility of government support. Investors are underestimating the role of government A characteristic relevant to the UAE economy is the role of emirate governments in economic activity. Since the governments are major player/partner in most of the major projects - directly or indirectly though various public sector entities - they will continue to play a role to ensure their smooth completion. Additionally, the individual governments will continue to invest in infrastructure and strategic projects (Abu Dhabi’s Vision 2030 is a case in point) which will ensure a steady economic growth and subsequent credit demand.
With the price of oil recovering sharply from its low of USD 33/bbl, the financial position of the Abu Dhabi Government is likely to remain strong and this will allow it to continue its investments as outlined in the Vision 2030 strategic plan. Although Dubai’s limited oil resources is likely to restrict its ability to increase its investment in the economy, it will derive indirect benefits from the expansion in Abu Dhabi by way of higher spending and investments made by Abu Dhabi nationals and government.