New Market Report Now Available: United Arab Emirates Commercial Banking Report Q3 2012
2012-06-27 08:17:20 - Recently published research from Business Monitor International, "United Arab Emirates Commercial Banking Report Q3 2012", is now available at Fast Market Research
BMI View: We retain a cautious outlook on the UAE banking sector in 2012 and are pencilling in only a moderate expansion in the industry's consolidated balance sheet. Domestically, weakness in the real estate market and Dubai's debt repayment schedule are likely to cap an aggressive expansion in banks' loan portfolios. We are projecting anaemic growth in the UAE's banking
sector in 2012, with the consolidated balance sheet of the industry forecast to expand by only 4.0% year-on-year (y-o-y) following estimated growth of only 2.0% y-o-y in 2011. Private sector deleveraging, ongoing declines in the real estate market, concerns over Dubai's debt-repayment schedule, higher loan loss provisioning, and increasingly tight liquidity conditions do not augur well for the sector over the coming quarters. While the industry, in aggregate, has remained profitable, a host of recently released and relatively uninspiring data points lend credit to the view that a significant degree of caution is still warranted. The total stock of credit outstanding in the economy expanded by only 3.3% in November 2011. This marked the 26th consecutive month of single-digit growth in the industry's loan books. The headline figure continues to mask a significant degree of divergence at the individual industry level, however, with United Arab Emirates Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 35 credit to the trade and government sectors increasing steadily in contrast with ongoing declines for transport, financial and personal loans for consumption purposes. The latter is particularly instructive, as ongoing deleveraging by UAE households continues to weaken the demand for new credit. While we expect new lending to remain subdued, our forecast for the total stock of credit in the economy to expand 5.0% y-o-y would nevertheless mark the highest rate of growth in five years. Matching broader trends in more developed markets, interbank liquidity has been gradually drying up over the past several months, which does not bode well for those still waiting for a more fundamental improvement in credit conditions. Indeed, the three-month Emirates Interbank Offered Rate (EIBOR) has gradually been ticking higher, coming in at 1.5200 on January 13, from 1.4725 in September 2011. That said, the rate of increase has been less pronounced than that seen in Europe, with the spread of three month EIBOR over LIBOR (the London Interbank Offered Rate) falling to a multi-year low of 0.9485 at the start of January. With concerns over the strength of the global economy elevated, and risk aversion associated with Dubai's onerous debt repayment schedule unlikely to dissipate, we expect interbank rates to gradually head higher over the coming months, which will only dampen new lending activity further. Profitability Remains, With Abu Dhabi Outperformance Broadly speaking, we expect Abu Dhabi's banking sector to continue outperforming their peers in Dubai through 2012. This is evident in many banks' latest financial statements to September 2011, with Abu Dhabi's banking industry seeing net profits increase 15.2% y-o-y, compared to only 8.2% in Dubai. Not only is the macroeconomic backdrop in the former more sanguine, but financial institutions in the latter must also contend with ongoing uncertainty surrounding potential debt restructurings from some of the country's largest government-related entities. As the recent record highlights, while many corporates have met their fixed income repayment deadlines, bank loans have received shorter shrift and have been more vulnerable to restructuring. As a result, specific provisioning for non-performing loans will likely continue increasing through end-year, although we expect the rate of expansion to gradually slow from current levels (see accompanying chart).
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