Retail loans expected to lift earnings for UAE banks

Retail loans, which are growing faster than corporate loans on improving macroeconomic conditions, are expected to boost second-quarter earnings prospects for UAE banks, analysts said.

Sector-wide profit in the first quarter stood at Dh6.13 billion, compared with Dh5.37bn in the year-earlier period.

“Retail growth is really good, although we’re not expecting overall loan growth to be much better than last year, said Aarthi Chandrasekaran, a senior research analyst at NBK Capital.

Last year, the UAE’s economy grew by more than 4 per cent, and the IMF expects growth of 4.5 per cent in 2014. This growth is expected to fuel demand for mortgages, cars and personal financing

Shabbir Malik, an associate vice president at the investment bank EFG-Hermes, said: “Banks will continue to focus on the retail segment, in terms of loans.”

Analysts also expect the reduced price of risk to boost banks’ profitability in the second quarter.

“We expect to see a continued drop in provisioning,” said Mr Malik.

Provisioning refers to setting aside of capital to account for expected losses from a loan book. As the riskiness of a book of assets declines, the amount banks need to set aside also falls.

“The cost of risk is declining at a significant rate,” said Ms Chandrasekaran. “That should lift up the bottom line.”

A rise in mortgage activity accompanying a boom in property prices is providing more business for banks. It is, however, a very small percentage of the loan book, so the extra business is not likely to lift up loans much.

“Seventy per cent of real estate transactions in the UAE are wholly cash-based, so mortgages are not growing at the rate they were in 2007 and 2008,” she said.

Overall, pressure on spreads – the difference between the rate of interest given on deposits and the rate of interest charged on loans – is expected to increase, analysts said.

Banks will reduce spreads, said Mr Malik, because “there’s excess liqudity in the system, interest rates are low, and there is healthy competitive pressure from other banks”.

Eibor, the rate at which the UAE’s banks lend to one another, currently stands at 1.09143 per cent – its lowest level for eight years, the longest period for which data is available.

The estimated hit to banks will be around 0.15 to 0.20 per cent of their profit margins.

But the general picture is bright. “Corporate fundamentals are better than elsewhere in the GCC, to the end of 2014, at least,” Mr Malik said.

And banks are expected to earn a lot from fee income. Volumes on the Dubai Financial Market and the Abu Dhabi Securities Exchange are high, which means there is plenty of brokerage work. A pick-up in merger and acquisitions activity could also be good news for the country’s banks.

In general, “non-interest income growth is better than interest income across the banking sector”, said Ms Chandrasekaran.

Analysts also said that UAE banks are faring better than their regional counterparts.

“If you look at the banking sector in Saudi Arabia and Qatar, you see very lacklustre operational performance in the last quarter of 2013, said Sanyalaksna Manibhandu, the head of research at NBAD. “Banking is something that Dubai and Abu Dhabi can be superior in. The banks here are better than the other banks in Egypt and Gulf – so they will benefit going forward more than other banks.”

Meanwhile, the overall share prices of UAE banks are up 14.46 per cent over the last six months, and up 43.65 per cent over the last year.

abouyamourn@thenational.ae

At a glance

Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.

Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year

Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month

Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30

Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse

Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth

Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”