Dubai: Standard Chartered Bank on Tuesday attributed decline in its UAE profits to heightened competition and margin compression in all major lines of business.
The bank last week reported a $35 million decline in its UAE operating profits to $289 million as it posted a flat operating profit of $442 million for the Middle East North Africa and Pakistan (MENAP) region.
“The decline [in profits and revenues] has been in line with our expectations. There is a lot of competition in the market. Margins have been under pressure across all business lines despite high volumes. Lower margins have been translated into lower profits,” said Mohsin Ali Nathani, CEO of Standard Chartered UAE.
In the MENAP region the bank’s total income fell $20 million, or 2 per cent, to $951 million, reflecting a challenging business environment, margin compression and heightened competition.
Income from the UAE, which generates over half of the income in this region, was down $35 million, or 6 per cent, to $596 million.
Robust liquidity in the banking system and relatively low growth in lending, trade finance and slowdown in financial markets have impacted the bank’s profitability in the UAE.
“In a highly liquid environment in the UAE, pricing is very competitive. Although the market has opportunities for balance sheet growth, we are focused on expansion that justifies return on assets,” said Nathani.
The bank is optimistic on growth opportunities in the UAE with an average credit growth of 5 to 6 per cent this year. “We expect the second half of the year to be in line with the first half or better than it,” he said.
While the wholesale banking business constitutes about two-thirds of its balance sheet, the bank is focused on relatively large corporate clients who benefit from the bank’s presence across some of the key global markets across the world. In the consumer banking business, the high value segment of the retail business and private banking business are doing well in the UAE with second highest growth of 17 per cent year on year in the second quarter after 25 per cent growth in Hong Kong for the same period.
The bank views, recovery in the property sector and completion the restructuring cycle of major companies following the financial crisis has improved the UAE banking sector’s confidence.
“Major corporates seem to have completed their restructurings. We haven’t heard any new names. Overall the credit quality of the UAE banking sector is seen improving,” said Nathani.
In the first half of 2014, loan impairment of Standard Chartered in MENAP region fell by $7 million to $27 million, largely within the UAE.
A consistent decline in loan impairment combined with improvement in margins is expected to boost the profitability of Standard Chartered and other banks operating in the UAE. “Asset quality improvements have been evident in the first half results of most banks. We expect the margin compression is on its fag end,” he said.
In the context of the growing optimism in the economy and rising liquidity in the banking sector, Nathani sounded caution on the possibility of excessive loan book expansion and a cyclical correction leading to asset impairments.
