Dubai: The UAE’s banking sector earnings are expected to soften further in the second quarter as many banks are likely to announce weak growth in lending and profitability in their second quarter earnings, according to banking sector analysts.

“We forecast bottom line to fall -3.5 per cent year on year in the second quarter as growth remains soft amid a challenging macro environment, net interest margins (NIM) is under moderate pressure, non- net interest income (NII) should slip, JAW ratio [ ratio of income growth rate to expense growth rate] are slightly negative despite operating expenses (OpEx) optimisation,” Jaap Meijer, head of Research at Arqaam Capital said in a note.

UAE banks are well capitalised and have comfortable liquidity position despite the difficult macroeconomic situation prevailing due to low oil prices. In 2015, profitability of UAE banks moderated and the trend is expected to continue in the short term.

“Loan loss provisions in UAE banks are expected to increase as they are currently lower when compared to GCC peers such as Kuwaiti banks,” Marmore, a subsidiary of Kuwait based Markaz said in a recent note.

The overall growth of the banking sector is expected to remain limited in the second quarter according to Dubai base Arqaam Capital, with a net loan growth of +2.1 per cent quarter on quarter and 5.7 per cent year on year and in the first half of the year.

Despite UAE’s diversified economy, fiscal consolidation and squeeze on deposits, particularly from the public sector has impacted the banking sector liquidity. Analysts say overall credit growth for the year is expected to remain sluggish in the context of lower credit demand from the private sector and the ongoing deleveraging from the small and medium enterprises (SME) sector.

“We forecast 1.3 per cent sequential growth in deposits and 6.6 per cent year on year growth in the second quarter of 2016. We still see loans to deposits ratio (LTD) stretched at 101 per cent at the end of May, mainly driven by public sector,” said Meijer.

The latest Credit Sentiment report by the UAE Central Bank showed demand for both business credit and personal loans slowed down across the UAE in the second quarter of 2016, particularly in Dubai. The survey showed further tightening in credit standards, “suggesting a higher degree of risk aversion in extending loans, especially to Small and Medium Enterprises (SMEs),” the report stated.

“[The results] suggested a lack of appetite for business loans. By emirate, survey respondents reported the softening in demand was observed in Abu Dhabi and Dubai, and most evident in Dubai where the registered net balance was slightly in the negative territory (-0.9),” the Central Bank said.

Analysts say redundancies and higher job losses in the corporate sector are impacting private consumption, resulting in lower retail loan growth. Corporates have looked to reduce costs and spending to adjust to the softer demand environment (domestic and external), which has involved job losses. Weaker corporate expenditure, including new investment, is adding to the softening domestic demand.

“This time around, the job losses were initially in the hydrocarbon and related services, real estate and construction sectors. However, this has spread into professional services such as banking and legal services, some government-related entities (GREs) and the hospitality sector as companies look to streamline their activities,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.