Dubai: After reporting robust growth in assets and profits in the first two quarters of this year, the UAE banks are expected to face strong headwinds on both these fronts from the fourth quarter as liquidity tightens.
With the third-quarter results set to be announced starting this week, analysts do not expect in a sharp deceleration in both asset growth and asset quality, but say there could be early signs of fatigue as the knock-on effects of lower oil prices on growth will be reflected in credit growth and a gradual reversal in the declining trend in credit losses over the past several quarters.
Declining asset prices, particularly the volatility in the stock markets and a drop in real estate transactions in the UAE, are also seen holding back asset growth and asset quality in a few quarters ahead.
“Today, we no longer view asset prices as a positive factor in recovery. Indeed, we expect continued volatility in the equities market, in line with movements in oil prices. For markets such as the UAE, we also expect to see a continued correction in real estate prices, potentially further contributing to credit losses,” said Standard & Poor’s credit analyst Suha Urgan.
According to the Central Bank of UAE data, total credit growth has remained strong in 2015, expanding 8.2 per cent year on year in August. Notably, there has been a change in the factors driving credit growth. Within the private sector, personal loan growth has been accelerating gradually in 2015 (to 8.6 per cent year on in August from 7 per cent in December 2014), which has supported the consumption outlook, the bank said.
“Retail credit growth remains stronger than corporate credit growth in 2015. This likely reflects a more cautious approach by businesses given the signs of softening economic activity,” Monica Malek, chief economist at the Abu Dhabi Commercial Bank.
Meanwhile, government loan growth has accelerated to double digits, which analysts say partly reflects the deterioration in the fiscal position. However, government borrowing accounts for only around 12 per cent of total domestic credit.
“We believe that credit demand could well weaken in late 2015 and in 2016 on the back of the softening macroeconomic backdrop and expected rise in borrowing rates. In the retail segment, weaker population growth and slower wage increases will also likely contribute to a deceleration in credit growth. We forecast some moderation in total credit growth, to 7.5 per cent in the fourth quarter of 2015 and around 5.8 per cent in 2016,” Malek said.
Analysts expect the UAE banking sector to face tougher funding environment as draw downs on deposits of government and government-related entities continue while slowing economy on the back of the sharply weaker oil price, filtering into the non-oil economy.
EFG-Hermes, said in a recent research note that a combination of such factors is likely to lead to a deceleration in loan growth, pressure on spreads and deterioration in credit quality,” said in a report last week.
In the first half of the year, earnings growth was more resilient thanks to declining provisions, which helped offset slower growth in operating income.
Although the banking sector’s fundamentals are expected to remain solid, underpinned by strong capitalisation levels and ample provisions to deal with the expected slowdown in economic activity, analysts see banks being impacted by lower oil prices and declining government revenues.