Banks are bracing for a tougher end to the year as deposits ease and consumers hold back from borrowing.
As banks prepare to release their third-quarter earnings, analysts expect the sector to face headwinds caused by funding pressures, a slowing economy and a protracted period of lower oil prices.
“The combination of these factors is likely to lead to a deceleration in loan growth, pressure on spreads and deterioration in credit quality,” said EFG-Hermes in a report to clients.
The Egyptian bank expects the earnings growth of the nine UAE lenders it tracks to drop 10 per cent year-on-year to the end of the third quarter.
That compares to 14 per cent growth in the second quarter compared to a year earlier.
It expects most growth to come from the banks setting aside less money to cover bad debts rather than from revenue from lending.
Until now, banks have shrugged off the sharp drop in oil prices.
Crude oil, which powers the region’s economic growth, has lost about half of its value in the past 12 months amid a glut brought about by more North American production coupled with a drop in demand from China, the world’s second-biggest economy.
The UAE’s federal government funds more than 60 per cent of its budget from revenues from crude oil sales.
Major UAE lenders – National Bank of Abu Dhabi, FGB, Abu Dhabi Commercial Bank, Emirates NBD and Dubai Islamic Bank – reported strong earnings in the first two quarters of the year, with many beating the expectations of analysts.
The past three years have been buoyant for UAE banks as they emerged from the 2009 debt crisis, in which many Dubai government-related entities came close to bankruptcy as property prices collapsed and capital markets dried up.
Government spending on infrastructure and low interest rates propelled the economy to grow at more than 4 per cent over the past two years.
However, the oil slump has put a brake on the UAE’s economic growth, with the IMF forecasting 3.2 per cent growth this year.
The chief executives of local banks including Alex Thursby of NBAD and Abdulaziz Al Ghurair of Dubai-based Mashreq, have been open about their expectation of lower loan growth, with estimates for 2015 averaging 5 to 6 per cent compared to last year’s 9 to 10 per cent growth.
The UAE, which holds 6 per cent of the world’s total reserves of oil, is more economically diversified than most of its Arabian Gulf neighbours and has been more proactive in dealing with the drop in oil by reducing energy subsidies, economists say.
Still, future earnings growth will depend on how long the slump in the oil price lasts.
One silver lining, however, may be the removal of financial sanctions on Iran.
UAE banks, especially Dubai lenders because of the city’s historic trade ties, may reap the benefit of increased trade if sanctions are lifted.
“Dubai is a convenient hub for businesses which aim to trade with Iran,” EFG-Hermes said. “We believe banks with strong trade franchise and deep branch penetration in Dubai would be key beneficiaries.”
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