Dubai: Banks in the United Arab Emirates are upbeat about 2018 with faster economic growth and higher interest rates set to boost earnings.

Banks are expected to raise lending by about 4 per cent to 6 per cent this year as Dubai prepares to host the Expo 2020. Interest rate increases by the Federal Reserve, which is shadowed by Gulf central banks, will also allow banks to raise loan pricing and improve net interest margins.

“Banks should do better because quality loan demand should pick up,” said Sanyalak Manibhandu, head of research at Abu Dhabi-based FAB Securities LLC. UAE economic growth will recover after decelerating for the past three years due to higher oil prices, he said.

Full-year results for those UAE lenders that have reported have mostly beaten analyst estimates. Still, competition to win loan deals and higher provisions could weigh on earnings.

Loan growth

Economic growth is expected to accelerate to 3 per cent this year from an estimated 1.8 per cent in 2017, according to the mean estimate of 13 economists compiled by Bloomberg. The recovery in oil prices will allow the government to restart delayed projects and may persuade companies to increase investments, all of which will need financing, according to Manibhandu.

First Abu Dhabi Bank expects its loan book to grow by a mid-single digit per cent this year compared with a 1 per cent decline in 2017. Dubai’s biggest lender Emirates NBD also sees a mid-single digit percentage growth compared with a 5 per cent increase in 2017. Dubai Islamic Bank expects loans to expand between 10 per cent and 15 per cent.

Bad loans

Slower economic growth since 2014 and lower commodity prices led to a surge in loan defaults, with problem loans peaking in 2016. Still, provisions for bad loans climbed to 5.3 per cent of gross credit at the end of November, from 5.1 per cent a year earlier, according to central bank data.

Provisions at some banks could rise with the implementation of new IFS 9 accounting rules from this year where lenders have to provide for losses on loans that are expected to turn bad instead of when they actually do, according to Manibhandu at FAB Securities.

“There are no signs so far to suggest that credit quality could deteriorate in 2018,” said Shabbir Malik, a Dubai-based analyst at EFG-Hermes Holding SAE. “The macroeconomic environment is largely favourable and some of the stresses that we have seen in small and medium enterprise and retail loans have already peaked or started to come down.”

Net interest margins

Most UAE banks expect stable or better net interest margins — the difference between what banks earn on assets and pay on liabilities and customer deposits — this year amid three projected interest rate hikes in the US. Still, some of these gains on margins could be squeezed as banks lower pricing on loans for borrowers to win deals, according to Malik at EFG-Hermes.

Emirates NBD sees its net interest margin to improving to between 2.55 per cent and 2.65 per cent, up from 2.47 per cent in 2017. Dubai Islamic Bank projects that its will stabilise between 3 per cent and 3.15 per cent, compared with 3.11 per cent last year.