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Moody : Top UAE banks remain resilient to economic conditions

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02/19/2017 | 03:12pm CET

Babu Das Augustine, Banking Editor

Dubai: Amid the strong economic headwinds, the UAE banks' overall profitability was resilient in 2016 led by top five banks.

Despite a decline in non-oil real GDP growth to 2.5 per cent in 2016 from a 2012 peak of 6.4 per cent, weighed by weak oil prices, UAE banks reported strong results according to rating agency Moody's.

The fourth quarter performance of leading banks were underpinned by higher fee and commission income from retail and corporate lending services. This helped offset a modest increase in operating expenses and higher funding costs, which rose to 1.2 per cent from 0.9 per cent a year earlier due to tightening liquidity conditions.

Impairment charges were also lower for most of the peer group in the fourth quarter as previous significant increases in loan loss coverage ratios have now given the banks' adequate financial buffers. However, the overall net profitability was 2 per cent lower than in the third quarter of 2016, and down 5 per cent from the fourth quarter 2015.

"We expect the five large UAE banks' core profitability to remain solid over the next 12-18 months. However, we anticipate pressure from rising funding costs as liquidity continues to tighten, and as banks increase their reliance on wholesale funding. We also expect a rise in impairment charges driven by continued economic slowdown," said Nitish Bhojnagarwala, Assistant Vice-President at Moody's.

Top five banks' combined net interest income in the fourth quarter of 2016 fell 1 per cent year-on-year, it rose quarter-on-quarter. The decline reflected a rise in funding costs, partly offset by higher lending volumes and asset repricing due to rising interest rates.

"Going forward, we expect net interest margins to remain broadly stable. Tightening liquidity is reducing lending appetite of the domestic banks which will ease competitive pressure allowing yields on corporate loans to rise," said Bhojnagarwala.

Although banks are expected to benefit from any US rate increases thanks to the peg between the dirham and the US dollar, these gains, however, will be counterbalanced by further increases in funding costs as slowing deposit growth makes the banks more reliant on costly wholesale funding.

In the last quarter of the year most leading banks reported a decline in provisioning charges, following significant increases in previous quarters to absorb a deterioration in the quality of small and medium enterprises' loans. Average provisioning expenses, as measured by impairment charges to pre-provision income, stood at around 18 per cent for four of the banks. The exception is ADCB, which reported impairment charges to pre-provision income of 30 per cent for this quarter due to challenging market conditions.

"Going forward, we expect provisioning costs to rise as a weakening economy increases problem loan formation. This will more than offset recoveries of legacy problem loans, which have been driving a decrease in impairment charges since 2015," said Bhojnagarwala.

While deposits increased across all five top banks in the last quarter, tighter liquidity conditions to continue weighing on deposit growth in 2017. While the large banks will remain largely deposit funded, analyst expect reliance on market funding to increase.

(c) Al Nisr Publishing LLC 2017. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info)., source Middle East & North African Newspapers

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Financials ($)
Sales 2017 3 778 M
EBIT 2017 1 596 M
Net income 2017 982 M
Debt 2017 1 491 M
Yield 2017 1,34%
P/E ratio 2017 22,25
P/E ratio 2018 20,12
EV / Sales 2017 6,11x
EV / Sales 2018 5,73x
Capitalization 21 586 M
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Mean consensus HOLD
Number of Analysts 14
Average target price 107 $
Spread / Average Target -5,1%
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Raymond W. McDaniel President, Chief Executive Officer & Director
Henry K. McKinnell Chairman
Linda S. Huber Chief Financial Officer & Executive Vice President
Tony Stoupas Chief Information Officer & Senior Vice President
Basil L. Anderson Independent Director
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