Pick- up in loan growth signals better profit outlook

RISING INTEREST RATES WILL SUPPORT UAE LENDERS’ INTEREST MARGINS

Improving operating environment linked to stronger economic growth, pick up in credit growth and higher interest rates are expected to boost profitability of the UAE banks in 2018.

The UAE Central Bank of UAE data for February show solid credit growth with the gross credit growth expanding by 0.5 per cent month on month in February after seeing growth of the same magnitude in the previous month. This is a significant improvement compared to loan growth in the fourth quarter of 2017. Yearly credit growth strengthened gradually to 2.1 per cent yearon- year in February, up from 1.7 per cent in December 2017, with monthly rises in the second month of 2018.

Private and government sectors were the main drivers of credit growth in February, expanding by 0.4 per cent month on month and 1.3 per cent month on month, respectively. Private sector credit growth was driven by the corporate sector ( 0.6 per cent) whilst retail credit growth contracted by 0.1 per cent.

“We believe that the monthly contraction in retail loan growth in the second month of 2018 reflected the weak underlying private consumption backdrop with the introduction of VAT and the soft labour market,” said Monica Malik, Chief Economist of Abu Dhabi Commercial Bank.

Maintaining strong credit growth amid rising cost of credit will be a crucial factor for banks. The improving credit growth trend in the first two months is widely seen as a positive indicator for a gradual rise in economic activity.

Analysts and bankers see non- oil activity being boosted by an acceleration in investment activity. Bankers expect that the revival in the local economy, supported by improving growth from both oil and non- oil sectors, will support a projected gross domestic product ( GDP) growth of 3.5 per cent to 4 per cent in 2018 and 2019, respectively.

We expect to see improved banking sector performance this year with 5- 6 per cent loan growth, compared to about 4 per cent loan growth last year.” Abdul Aziz Al Ghurair | CEO of Mashreq Bank and chairman of the UAE Banks Federation

“We expect to see improved banking sector performance this year with 5- 6 per cent loan growth, compared to about 4 per cent loan growth last year.” said Abdul Aziz Al Ghurair, CEO of Mashreq Bank and chairman of the UAE Banks Federation.

Improved fiscal situation combined with recovery in oil prices are expected to lift governmentled investment activity driving economic growth. The International Monetary Fund has forecast a 3.5 per cent GDP growth for the UAE in 2018 compared to 1.8 per cent last year.

Central bank data showed banking system deposits dropped for a third consecutive month in February, contracting by 0.1 per cent month on month. However, this was a moderation from the 0.4 per cent fall in January. Despite the drop in deposits, liquidity in the banking system remains comfortable. Indicators of liquidity, such as the loanto deposit ratio and the bank’s reserves at the central bank, point to greater liquidity than in mid- 2017.

While increasing interest rates are likely to have a dampening impact on loan demand analysts see it as credit positive for UAE banks as the economic outlook is positive and liquidity and capital positions remaining strong.

“We expect that rising interest rates will support UAE banks’ interest margins through higher gross yields, as banks gradually reprice their loan books while wholesale funding costs stabilise amid firmer oil prices,” said Mik Kabeya, an analyst at Moody’s.

VAT, IFS 9 and technology

The UAE’s banking sector is expected to face increased cost of operations from costs associated rapid technology innovations, new regulations and the impact of value added tax.

While most banks have factored in the balance sheet impact of IFRs 9, it is expected to be more visible in the financial statements for the first quarter of 2018.

“There will be substantial impact as banks comply with the new reporting standards. While the increase in provisions is not as severe as in Europe, they are substantial and will require banks to reflect on the profitability of some business lines in their current format,” said Luke Ellyard, Partner Financial Services, KPMG.

As banks grapple with the new VAT regime and the high compliance costs associated with mandatory VAT registration and the inability for banks to claim all input VAT due to a large proportion of their services being exempt, KPMG analyst expect that banks could be forced to increase their fees to compensate for the additional costs.

Amid rising operating costs linked to technology adoption and compliance to new regulations, the UAE banking sector has a healthy outlook for 2018, according to KPMG.

We believe that the monthly contraction in retail loan growth in the second month of 2018 reflected the weak underlying private consumption backdrop with the introduction of VAT and the soft labour market.” MonicaMalik| Chief Economist of A bu D ha bi Commercial Bank