LONDON: The UAE banking sector is well-positioned for future growth, with the days of “bad loans” dragging down bank balance sheets “behind us,” according to the country’s top banking head Abdul Aziz Al-Ghurair.
“I think banking in the UAE is in a very good position,” said Al-Ghurair, who is the CEO of Mashreq Bank in Dubai and the chairman of the UAE Banks Federation.
“Our capital adequacy is at 17 percent so this is pretty high around the world. The cost to income ratio is below 40, which is a really fantastic number so ability to generate profit is high,” he said, speaking to Arab News on the sidelines of a conference in London.
“There will always be bad loans, but it is healthy to have some bad loans, because you really are pushing the envelope. If you have zero bad loans, you are not lending enough and so the economy will also suffer. As long as (it is) affordable that is ok,” he said.
His comments came as many of the UAE’s larger banks posted substantial increases in profits, a trend most analysts forecast to continue for at least the next year. The four of the largest banks — First Abu Dhabi Bank, Emirates NBD, Abu Dhabi Commercial Bank and Dubai Islamic Bank — posted a combined net profit of 8 billion dirhams ($2.2 billion) in the second quarter of 2018, up 21 percent compared to the same period last year.
A note from the ratings agency Moody’s Investors Service issued in August said: “We expect core profitability to stablize over the next 12-18 months. We expect profitability for the large UAE banks to remain broadly stable as their interest earnings hold steady at current levels.”
While banks are expected to maintain high levels of profitability, there are signs that non-performing loans are beginning to trouble some institutions, particularly the smaller entities.
Non-performing loans ratio to gross loans (NPL) reached 6.7 percent at the end of 2017 compared to 6.4 percent the previous year, according to UAE Central Bank statistics. Preliminary data suggests this could edge up to 7 percent for the second quarter of this year.
“We expected this (increase in NPLs) given the relatively slow growth in 2017, which tends to have a lagging effect on banks’ asset quality,” said Mik Kabeya, lead analyst for UAE banking system at Moody’s.
“The weakening asset quality is manageable for banks given their buffers in terms of capital and profitability but we do expect an uptick. It will be primarily driven by soft performance on the retail, SMEs and mid-corporates segments.”
Chiradeep Ghosh, financial institutions analyst at Sico Bank in Bahrain, said it was a mixed picture for non-performing loan volumes.
“We did not see any clear trend with UAE banks’ asset quality in the second quarter of 2018, with some banks reporting pick-up in delinquencies while others report improvement,” he said.
Ehsan Khoman, head of Mena research and strategy at the Dubai branch of MUFG Bank, said the banks have remained stable despite signs of looming problem loans.
“The UAE banking system remains benign owing to a buoyant economic operating environment, notwithstanding the recent pick-up in non-performing loans,” he said in an emailed note.
Al-Ghurair said the country’s financial institutions are now far more able to weather any deterioration in assets due to the UAE’s more diversified economy.
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