Stock DFM Dubai stock market traders
The banking sub-indexes did go through a volatile phase in 2020, but a bounce back could be imminent if key players show they can keep provisions in check. Image Credit: Antonin Kelian Kallouche/Gulf News

The UAE banking sector has passed through a turbulent phase, and this is showing up on UAE's stock markets as well. An index heavyweight on DFM, the banking sector (with 45 per cent weightage) is down by 10.23 per cent for the year, while in Abu Dhabi, the sectoral index (with 55 per cent weightage) is down 8.81 per cent.

Market leaders Emirates NBD and FAB are down 12.82 per cent and 8.24 per cent for 2020. UAE lenders have been at the forefront of various stimulus measures and in extending support to the broader economy. This has to some extent benefited overall earnings for UAE banks in the form of extensive central bank support and loan deferment programmes.

Until September, the quarterly operating income for UAE’s 10 largest banks aggregated Dh19.9 billion, down from 2019’s Dh22 billion. The results, in line with market expectations, were strongly supported by UAE Central Bank’s Dh256 billion stimulus scheme.

Keep feeding funds

This ensured continous liquidity at a time when there was desperate need for it. Rising loan impairments and provisioning have been a constant theme. In the UAE, smaller banks tend to have a larger exposure to an SME portfolio compared to FAB and Emirates NBD, both of whom have sizeable corporate and government portfolio.

Their exposure to state-linked enterprises also comes as a huge strength as it indirectly associates them with a sovereign rating and also access to better funding from money markets based on these.

Emirates NBD is currently trading at a forward 12-month P/E multiple of 10.39 and its EPS is expected to be in the range of Dh1.00–Dh1.75 over next three-year period. FAB is trading with a forward 12-month P/E multiple of 15.34 with its EPS expected to be Dh0.90–Dh1.20 over the next three years.

UAE government agencies forecast the economy growing by 3.6 per cent next yearm primarily based on stimulus measures announced so far (Dh388 billion) and growth recovery on the back of vaccine availability. Of keen interest to local businesses and banks would be next year’s Expo.

Expo-sized boost

The event could not have come at a better time with a majority global economies likely to ensure that mass vaccinations start taking place by the first or second quarter. This would also mean relaxation of rigorous quarantine measures that have held up global growth so far. Of course, the risk of a new COVID-19 strain remains at large and can affect global growth momentum.

The overall path to recovery will be more subdued in nature. UAE banking sector has already seen a lot of consolidation in form of increased digitalization, mergers and acquisitions as well as other cost saving measures. Increased provisioning measures have allowed these lenders to build up a sufficient capital buffer in case of an even adverse scenario.

Net interest margin (NIM) for major lenders will likely stabilize in the near term. Among major lenders, Emirates NBD's first nine-month 2020 NIM of 3 per cent stands out. This reflects the bank's solid and cost-efficient funding franchisee.

- Vijay Valecha is Chief Investment Officer at Century Financial.