Dubai: After enduring three consecutive years of asset impairments and rising provisions which ate into profits, most UAE banks see a light at the end of the tunnel.
Ahead of the first quarter results, banking analysts said this year will be a year of a big comeback in terms of profitability for the banks after more than three years of balance sheet repair.
"The current year is expected to bear sweeter fruit, with one-off adjusted profits rising 22 per cent year on year. Bottom-line growth is anticipated to be driven by a drop in provisions," said Naveed Ahmad, senior financial analyst with Global Investment House.
According to a recent study by Boston Consulting Group (BCG) the banking industry experienced an impressive 24 per cent increase in profits in 2011 and the outlook remains strong.
Although banks showed a strong recovery last year, some analysts attribute the surge in profits to significant one-off revenue streams. But this year even without the contribution of one-off items, banking profits are expected to surge.
"Our discussions with banks have led us to believe that banks' non-performing loans (NPLs) are nearing the end of the current cycle. The NPL ratio is expected to peak in 2012 for most banks and in 2013 for others NPL formation will decelerate significantly for all," said Ahmad.
Collective impaired loans of leading UAE banks jumped by almost 6 times between 2008 and 2010. This was on the back of defaults and/or restructuring of companies such as Sa'ad & Algosaibi, Dubai World and then Dubai Holding amongst other names, and retail loans also played a major role.
Performing
A slowdown in NPLs was also assisted greatly by de-recognition of certain exposures that were restructured and subsequently deemed and categorised as performing. Write-offs also played an important part in reducing the NPLs as Dh4 billion worth of loans was written off last year.
In the consumer banking portfolios banks seem to have written down most of the NPLs and the likelihood of a near-term surge is ruled out because of the strict risk management practices and significant improvement in asset quality.
However analysts warn that some of the corporate portfolios are expected to be a source of NPLs in the current year but the impact will be relatively smaller.
On the funding side, most banks are facing extremely short deposit maturities. This seems to be an outcome of two things: first, anticipating low loans distribution and a low interest rate scenario, banks have shed high-cost deposits which is usually synonymous with higher-maturity deposits and increased focus on mobilising low-cost deposits which come in the shape of low maturities.
Secondly, given the low interest rate returns and volatile market conditions, depositors have been reluctant to lock their deposits in for longer periods.
To remedy the short maturity profiles most UAE banks have deployed their medium-term note programmes and other long term debt raising facilities to extend the life of their source of funds.
This however comes at an additional cost to the top-line, since interest rates on these facilities are likely to be higher than those paid on deposits currently.
Despite the decline in NPLs, credit growth is likely to remain subdued. Credit growth in the UAE has been subdued since 2009, and is likely to remain so, at least in the first half of 2012, particularly given the rebound in loan-to-deposit ratios from 94.0 per cent in May 2011 to 100.1 per cent in December.
"While we expect private sector credit growth to remain relatively muted in 2012, in the context of still strong public sector demand, there are some encouraging signs in the data. Bank lending to the private sector appeared to be improving in the last quarter of 2011, reaching 3.4 per cent year on year in December after contracting for much of 2010," said Khatija Haque, senior economist at Emirates NBD.
