UAE banking sector profits expected to decline 10 to 20 per cent in 2016

Dubai: The UAE’s banking sector is expected to face 10 to 20 per cent contraction in profits this year due to persistent slowdown in various sectors of the economy, said Abdul Aziz Al Ghurair, Chairman of The UAE Banks Federation (UBF).

“Clearly the slowdown in the economy will be reflected in the performance of the banking sector. But despite the slowdown in the economy, the UAE banking sector has been far more resilient to the economic headwinds compared to other international banking systems such as European, American, Japanese and Far Eastern banks. In comparative terms we have done extremely well,” said Al Ghurair.

“Our banks are too spoiled because of years of high profits, high margins and strong asset growth over several years. A slowdown is good for the sector because bank managements will seek to innovate to make business more efficient.”.

The outlook for 2017 is also expected to be tough in the context of the difficult operating environment. Al Ghurair expects the profit growth to be in the range of plus or minus 5 per cent year on year in 2017.

Commenting on the impact of the bankruptcy law on the banking sector he said it is major development for banks and its customers in the country. While pushing for a legal framework for bankruptcy protection, the UBF has tried out its own version of bankruptcy protection earlier this year paving the way for restructuring of nearly Dh7 billion loans to businesses that faced financial trouble.

Once the framework for the new law is in place, Al Ghurair expects a number of banks in the country will come forward to support businesses wanting to restructure, but he expects cost of financing to be higher because of the higher risks involved.

Following on the announcement that the UAE will implement a commercial bankruptcy law, the government has also indicated an individual bankruptcy law is in the making and it could be implemented as early as next year. Al Ghurair said, such a law should by linked to the bankruptcy protection laws outside the country.

“We will have to examine the pros and cons for an individual bankruptcy law. Making this law, without linking it to his home country, is going to be suicidal for the UAE,” said Al Ghurair said.

“Ninety per cent of our borrowers are expats. If they borrow here, declare bankruptcy, get protected here, they can go home and can start again there,” he said.

Because of this danger, the UAE cannot make this law for individuals without assurances. But with so many nationalities represented the UAE, even trying to come up with agreements with home countries could prove difficult, and even create an unbalanced system, treating different nationalities differently.