Dubai Islamic Bank has kicked off earnings season for commercial lenders with a sharp increase in net profits for the quarter, as investors bet on bumper profits for banks.
Bank shares have surged as banks repay government life support extended to cover the financial damage from the Dubai property crash of 2009. Money set aside by banks to cover bad loans is widely expected to have peaked.
Cash-rich UAE companies, coffers swelling from high tourist arrivals and a resurgent property market, are helping banks to boost their deposit levels - in turn encouraging them to lend more in the form of car loans and credit cards, as consumer finances strengthen.
Dubai Islamic Bank Group reported net profits of Dh301.7 million (US$82.1m) for the first quarter, representing a 17 per cent increase compared with the same quarter last year. Its shares have surged 17.8 per cent since it said last weekend that it would repay Dh3.7 billion in crisis-era funding from the UAE Government.
But investment banks are tipping the sector to report healthy growth in profits as they start to report first quarter earnings this week.
"While there is still limited visibility regarding the asset quality outlook, we see a number of reasons to believe that we are past the worst," analysts from Deutsche Bank wrote in a research report. "2013 should represent the fourth straight year of economic expansion."
Bank stocks are the year's second-best sector performer after property companies, the ADX Banks Index rising 25.1 per cent so far this year. Their Dubai counterparts are not far behind, with a 22 per cent increase during the same period.
The high prevalence of bank stocks on both exchanges helped to push the Dubai Financial Market General Index into a bull market this month, with stocks on the Abu Dhabi Securities Exchange (ADX) currently not far from joining them. (A bull market is defined as an increase of 20 per cent or more during a given period.)
Bank lending disappointed analysts last year, with an increase i during 2012 of just 2.6 per cent. Data has not yet been released for this year by the Central Bank.
Lenders dodged the implementation of tighter regulation earlier this year, although authorities continue to work on new rules intended to prevent asset bubbles from forming. Mortgages, liquidity requirements and lending to arms of the Government and its holding companies remain under discussion at the Central Bank.
But repayments by the banks of crisis-era funding facilities from the Ministry of Finance has caught the attention of traders. Shares in Dubai Islamic Bank, which said in early April that it had repaid Dh3.7 billion in funding, have rallied 17.8 per cent since.
Banks are showing greater signs of confidence that they need no government support to help to deal with the bad debts overhanging since the property bubble burst.
"All banks without exception made significant progress reducing loan loss provision shortfalls following the crisis of 2008," analysts from HSBC wrote in a recent research note.
But the bank remains concerned that record low borrowing costs, while great for companies, will hinder bank profitability, which it estimates at about 9 per cent for Abu Dhabi lenders during the year ahead.
"Low interest rates present key hurdle to earnings growth in the GCC," the report said, adding that banks had scope for "further declines in funding costs and room to reduce loan loss provision expenses".
Deutsche Bank believes the lack of lending will result in banks that accumulate bigger capital hoards, which bodes well for investors expecting higher dividends and could encourage valuations closer to emerging market banks, which the UAE's lenders currently lag.
Commercial Bank of Dubai is expected to be the first to report earnings - doing so on Thursday.