UAE equities remain shaky ahead of US voting day, with banks bearing brunt of it
Provisions are higher, but third quarter numbers still give reason for hope
The UAE equities continue to post a mixed performance, with DFM in the red by 1.18 per cent and ADX edging higher by 0.25 per cent. A Joe Biden win could be positive for UAE equites on account of a possible reduction in trade tensions between the US and China, and which should lead to better global growth prospects. And, hopefully, higher demand for crude oil.
Also, a Biden win could see a larger fiscal stimulus, resulting in a ‘V’ shaped economic recovery.
Today’s DFM decline was quite sharp and the fall can be attributed to its two largest constituents - Emirates NBD and Dubai Islamic Bank (DIB). The two together account for more than 40 per cent of the market capitalization.
DIB declined by 1.95 per cent while Emirates NBD closed lower by 1.37 per cent. It is possible that markets are not receptive to Emirates NBD’s plan to bid for Blom Bank’s Egyptian assets. Investors might be of the view that Emirates NBD’s exposure to markets like Turkey and Egypt comes with too much risk.
On the charts, Emirates NBD is trading below its 50-,100- and 200-day simple moving averages, indicating weakness.
Third quarter musings
An analysis of the results of these banks will help us in understanding the banking sector. Due to its acquisition of Turkey’s Denizbank, Emirates NBD financials are not comparable, and so has not been considered.
For the remaining, aggregate provisions in the third quarter had risen by 25 per cent to Dh3.13 billion from Dh2.51 billion in the comparable quarter last year. This is consistent with market conditions, and a lot of businesses have witnessed disruption and are not able to honor their loan commitments.
The total revenue of banks excluding Emirates NBD declined by 22 per cent from Dh21.51 billion last year to Dh16.73 billion in the third quarter. Net profits declined by 28 per cent from Dh7.07 billion to Dh5.11 billion on account of higher provisions.
On a quarter on quarter basis, matters seem to be gradually improving. At least, the haemorrhage seems to have stopped. When compared to the second quarter, revenues have declined by only 6 per cent.
And net profits actually rose by 2 per cent on a quarter-on-quarter basis. There finally seems to be light at the end of this tunnel…
- Vijay Valecha is Chief Investment Officer at Century Financial.