Good times are over for banks

The third-quarter reporting season for banks is over and the figures reveal what many had suspected: the good times are gone, with finance houses provisioning against losses and bracing themselves for a slowdown. Net profits at all major banks declined from the second quarter because of losses in investment portfolios and the need to put aside a significant portion of their income in case of defaults. Third-quarter profit at Emirates NBD dropped 30 per cent compared with the second quarter; National Bank of Abu Dhabi (NBAD) dipped 35 per cent; Abu Dhabi Commercial Bank (ADCB) fell about 32 per cent; while Mashreqbank recorded a drop of more than 50 per cent. "The third quarter was really a set of results for the banking system which in part reflected the increased turmoil in the international markets," said Sanjay Uppal, the chief financial officer of Emirates NBD bank. "The key piece is how the market will perform through the fourth quarter and everything I've read so far [indicates] we'll see further pressure on the financial systems, especially as US consumer spending contracts." The decline of global stock markets has put lines of red ink on the balance sheets of all banks. Emirates NBD, the nation's largest bank, suffered a Dh273 million (US$74.32m) write-down because of losses incurred in its global and regional investment portfolio; NBAD lost Dh85m; ADCB took a Dh54m hit; and Mashreqbank's investment income dropped to Dh75m from Dh553m. All the major banks have set aside huge sums in case of losses from defaults, with Emirates NBD provisioning Dh298m, NBAD Dh169m and ADCB Dh259m compared with Dh160m in the second quarter. Mashreqbank has not disclosed its provision. Analysts have applauded the banks' prudence. Radwa el Swaify, an analyst at Beltone Financial in Cairo, said it would be clearer next year whether there would be a dramatic lift in defaults. "There may be some signs of real estate softening, but currently there is no reason that we could say there will be a lot of sour loans," she said. "Maybe by the end of 2009, the picture will get clearer." One positive sign for the industry during the quarter is that at some banks, the loan growth rate is in line with an increase in deposits. This suggests that banks are not being overtaxed because of borrowing at high rates. Instead, they are relying more on deposits, which serve as the cheapest source of funds for lending. At NBAD, for instance, deposits increased nine per cent, compared with six per cent for loans. In the previous quarter, loans grew 63 per cent while deposits increased a mere 15 per cent. Deepak Tolani, an analyst at Al Mal Capital, wrote in a note that deposits funded 69 per cent of NBAD's loan business during the quarter, which helped to reduce the loans-to-deposit ratio to 116 per cent, from 119 per cent the previous quarter. According to financial analysts, the banking industry in the UAE is in better shape than banks in US and Europe. Only ADCB has suffered massive losses from investments related to the subprime mortgage portfolios, and there has not been a spate of loan defaults. In fact, third-quarter results generally increased from a year ago as core banking business remained strong. However, the tanking during the summer of the global financial markets and provisioning for anticipated losses reduced profits from the previous quarter. The worsening global credit crisis and lack of cash in international markets is expected to put more pressure on banks in the final quarter. "All the troubles we have heard about in terms of liquidity, banks would probably feel it in the fourth quarter," said Sofia el Boury, a research analyst at Shuaa Capital. In the past five years, the banks have basked in the market's insatiable demand for loans during the economic boom and aggressive development plans. When deposit growth did not keep up with loan demands, banks made up the difference by borrowing on international markets. Since the financial crisis gripped the globe, however, international banks have tightened lending and the cost of borrowing has increased markedly. "Banks will have to slow their lending growth," Ms Swaify said. "They will have to take it very cautiously going forward and they have to pace lending with whatever funding they've got." The Government's decision to inject Dh70 billion into the system, however, could allay some of the problems facing banks. The injection of about one third of that fund two weeks ago, which made more money available for lending by banks, has already made an impact - with the country's benchmark interest rate declining almost immediately. The Emirates interbank offered rate (Eibor) - the interest rate that banks charge each other, which also serves as the yardstick for all other rates - began falling last week. It fell to 4.47 per cent yesterday, easing about 7 per cent from its six-month peak of 4.79 per cent on Oct 30. "The injection of liquidity will help, but what it won't do is completely take away the pressure," said Mr Uppal. Although he does not believe the region will fall into a recession, the financial suffering elsewhere will still hit home. Banks are making some painful adjustments in preparation for the looming slowdown and a possible property market crash. Talk of consolidation and mergers is ever present, although no deals have yet been finalised. Either way, bankers are realising that they are operating in a new landscape and need to be more prudent. According to Eirvin Knox, the chief executive of ADCB, loan growth could slow to between 10 and 15 per cent from nearly 50 per cent because of liquidity constraints stemming from the global financial turmoil. "Financial markets are in turmoil and this is an effect on the local banks," he told Reuters yesterday. "In the last two to three years we've seen 40 to 50 per cent growth in loans per year." According to data from the Central Bank, credit growth hit 49 per cent in the year to June. "Clearly, that type of growth is not sustainable in the long term and it may fall to a 10 to 15 per cent level this year and next year," Mr Knox said. mjalili@thenational.ae