Improving economic fundamentals and a decline in provisions is expected to boost asset growth and give a push to profitablity of the banking sector this year and next. Image Credit: Ahmed Ramzan/Gulf News Archives

Dubai: The UAE’s banking sector is expected to see a steady improvement in asset growth and profitability in 2018 and 2019 thanks to improving economic fundamentals and a decline in provisions, said Abdul Aziz Al Ghurair, CEO of Mashreq Bank and Chairman of the UAE Banks Federation.

“Last year the UAE banking sector reported strong results with total assets surging 4 per cent to Dh2.7 trillion making us the biggest banking sector in the Arab world and 8 per cent growth in combined profits to Dh38 billion. Return on assets for the UAE banks was 12.7 per cent and return on equity was 10.7 per cent which is very good. We expect further improvement in all key performance matrixes in the current year and the next,” said Al Ghurair.

The banking sector liquidity remained strong last year with lending to stable resources ratio at 84 per cent. Capital adequacy at 18.1 per cent, which is 50 per cent higher than the central bank requirement and banks in general, met all regulatory requirements last year.

“We expect to improve the performance this year with 5 to 6 per cent loan growth compared to about 4 per cent loan growth last year. Net profit growth should be better than last year due to improving asset quality and economic conditions,” Al Ghurair said.

rise in UAE banking assets to Dh2.7 trillion last year


IFRS 9 impact

From this year the implementation of International Financial Reporting Standard 9 (IFRS 9) will require banks to take a more forward-looking approach to provisioning. Earlier banks were required to set aside specific provisions only when they incurred losses, or when the counterparty or financial asset defaults on its obligations. Under IFRS 9, banks will have to set aside provisions in advance, based on their loss expectations. As part of the IFRS 9 implementation, in the first year, banks are allowed to take provisions as a one-time hit on their equity.

“This gives all banks the opportunity to clean their provision requirements at one go and book better profits this year and going forward better manage their provisions,” said Al Ghurair.

While the banks are expected to complete the one-time provisioning of future losses in the first quarter of 2018, the banking sector profitability next year is expected to be in double digits.

rise in banking sector profits to Dh38b last year

Revival in the local economy is expected to support banking sector in 2018 and 2019 with the GDP projected to grow in the range of 3 to 4 per cent. Both oil and non-oil economy are expected to report robust growth this year thanks to improved performance of travel and tourism sectors, economic gains linked to Expo 2020 and improvements in oil prices.

The performance of the property sector, Al Ghurair said, would depend on the supply-demand dynamics in the market and the developers need to closely watch these. “Property prices have softened by about 20 per cent. This may be good for cost of doing business in terms of lower accommodation costs, but developers need to be cautious and manage the supply,” he said.