Strong growth for UAE banks

(MENAFN- Khaleej Times) The UAE banking sector is poised to register year-on-year deposit and asset growth of 13.6 per cent and 12.2 per cent, respectively, over 2015-17, underpinned by a strong macro picture, a leading investment bank said on Monday.

"The peg to the dollar provides some defence against adverse forex moves, while [US] Fed action should, on balance, benefit bank margins," Renaissance Capital, a leading emerging and frontier markets investment bank, said in its forecast.

RenCap, as the firm is also known, believes that UAE banks offer "a gateway to growth" within Middle East North Africa region and beyond, given fiscal spending, private sector growth, population growth and the country's status as a growing hub for access to business in a region spanning Africa to south Asia.

On Monday, Central Bank of the UAE Governor Mubarak Al Mansouri said he expected credit growth to remain robust and that there was excess liquidity in the country's banking system. Last week, the central bank said it would be enacting a number of regulations for controlling and monitoring of liquidity at banks.

"The UAE continues to show a relatively attractive macro picture, in our view, comprising large fiscal savings, strong population growth and the GCC's strongest non-oil economic base. We see limited risk of system shocks, while the International Monetary Fund expects real gross domestic product, GDP, growth to average 3.2 per cent in 2015-16, [4.5 per cent for non-oil growth]," the RenCap report said.

RenCap's forecast is more bullish than the recent outlook given by S&P, predicting "a slowdown in credit growth to seven to eight per cent from 15 per cent for rated UAE banks in 2014, and noticeably weaker deposit growth, with renewed but manageable pressure on asset quality".

Dr Monica Malik, chief economist at Abu Dhabi Commercial Bank, had forecast that personal loans would drive private sector credit growth at around 8.3 per cent in 2016 following a 7.8 per cent expansion in 2015.

RenCap said the evolution of UAE banking is likely to be all about technology, mobile and digitisation, given the smaller but wealthier population and high mobile and internet penetration levels.

"Key downside risks to our forecasts and valuations include sharper margin compression, lower growth and higher provision costs. Structurally, the UAE remains exposed to prolonged weakness in oil prices."

The fact that there is no income tax on local corporate profits makes UAE banks more profitable than banks in other countries, RenCap said.

"The monetary foundations [peg to the US dollar] also mean a de-facto US dollar pricing on funds, set against yields that are more typical of emerging economies," it said.

Banking system penetration in the UAE as measured by total assets is high, at close to 160 per cent of GDP, which was $402 billion in 2014.

"The UAE banking landscape is competitive, with 23 local banks and 29 foreign banks operating in the country. Of the 23 local banks, 17 have either significant minority or majority ownership by individual emirates. Consolidation has been much discussed, but is unlikely in the near term, in our view, given the idiosyncrasies of politics and ownership within the UAE. Foreign banks face limitations on the number of branches they can operate [eight], but the UAE is a World Trade Organisation signatory and further compliance with WTO rules may result in an easing of such restrictions in the future," RenCap said.

Total banking sector assets in 2014 stood at $631.47 billion, while the estimated aggregate profits were at $12.63 billion, implying a return on assets of two per cent.

"We surmise therefore that the UAE banking system is well funded, liquid, and well capitalised. NPLs [non-performing loans] remained high at 7.1 per cent in 2014. Guidance from the majority of UAE banks is that this number is set to decrease," RenCap said.