Dubai: The UAE banking sector reported another soft quarter with a general decline in earnings driven by higher credit costs, somewhat higher provisioning while most banks say the worst is behind them.

Amid the overall subdued trend in credit growth and profitability, banks continue to remain resilient to difficult operating environment resulting from prolonged low oil prices and a slowdown in the UAE’s economic growth from 4 per cent last year to a projected 2.3 per cent in 2016.

“Credit costs continue to increase 9.8 per cent quarter on quarter and 25.5 per cent year on year as banks provide for the SME stress. Most banks expect to see credit quality deteriorate in the retail segment, especially in the personal loan space, which should keep loan loss provisioning elevated in the next few quarters. We think the SME stress is having knock-on effect on retail, said Jaap Meijer, the head of research at Arqaam Capital.

Most banks reported either slowdown or stagnation in net profit growth in the third quarter. Emirates NBD and Dubai Islamic Bank reported flat growth in third quarter net profits, but showed modest growth in profits over the nine month period.

Asset quality

DIB reported a net profit of Dh3.01 billion, up 7 per cent compared with Dh2.8 billion for the same period in 2015. For the third quarter of the year the bank maintained a net profit of Dh1 billion, marginally up compared to same period last year. On the asset quality front, bank’s impairment losses declined to Dh304 million compared with Dh341 million for the same period in 2015. While the non-performing loans (NPLs) declined, the NPL ratio declined to 4.4 per cent, compared to 5 per cent at the end of 2015.

Emirates NBD reported a net profit of Dh5.4 billion for the first nine months of 2016, up 8 per cent compared to the same period last year. In the third quarter of the year the bank reported a net profit of Dh1.66 billion, marginally down by 1 per cent year on year.

The bank’s cost of risk continues to normalise as impairment charge of Dh2.18 billion is 22 per cent lower than at the close of the third quarter of last year. Provisions of Dh729 million in the third quarter of 2016 was down 11 per cent as net cost of risk continues to normalise helped by further write backs and recoveries. Non-performing loans ratio improved to 6.4 per cent from 7.1 per cent at year-end 2015 and coverage ratio strengthened to 120.8 per cent.

Liquidity position

“The operating performance improved for the first nine months of 2016, thanks largely to lower impairment allowances backed by higher recoveries. The Group’s liquidity position improved further, bolstered by a stable and highly diversified deposit base and our ability to raise over Dh19 billions of term funding in the first nine months of 2016,” said Surya Subramanian, Group Chief Financial Officer.

Analysts expect profitability will be under pressure for a few more quarters ahead. “Margin compression persists on increase in funding costs, which is not yet passed on to customers via re-pricing. Competition remains intense in the retail market affecting pricing, while corporate is showing some improvement in third quarter of this year,” said Meijer.

Banks with smaller balance sheets continued to reel from asset quality deterioration and increase in cost of funds. Banks such as RAKBank and Commercial Bank of Dubai continue to face elevated loan loss charges and increased cost of funds. Amid rising margin pressure banks continue to keep tabs on cost amid weak revenue generation in a challenging operating environment.


Factbox: Outlook remains stable despite challenges

Analysts say despite slowing economy, rising cost of funds and a gradual rise in loan impairments the outlook for the UAE banking system remains stable.

“In our view, the country’s banks will maintain stable credit profiles despite a slowing economy and subdued demand for credit caused by low oil prices, said Nitish Bhojnagarwala, Assistant Vice President — Analyst at Moody’s.

While the operating environment for banks is expected to soften in the context of slowing economic growth reduced public spending is expected to soften the demand for credit resulting in domestic credit growth to slow to around 3 to 5 per cent annually for 2016 and 2017, down from around 8 per cent for 2015.

Asset quality is seen weakening modestly after a period of strong recovery. “We expect problem loans to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around 5 per cent currently. We expect rising problem loan formation in the small and mid-sized company (SME) and retail (loans to individuals) segments, although continued resolution of legacy problem loans will offset some of this increase,” said Bhojnagarwala.

The rating agency expects downside risks to banks could stem from the sizeable and volatile real-estate sector and from concentrated exposures to large government related institutions.

For the banking sector as a whole capital buffers are expected to improve further form internal capital generation, combined with subdued asset growth. Loan-loss reserves were a solid 94 per cent of problem loans as of June 2016.