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UAE Banks’ Q2 Profits Seen Weaker on Loan Provisions

Analysts said that banks underperformed in the second quarter, with many still reeling from the global financial crisis and the subsequent liquidity squeeze, while defaults by Saudi groups have raised concerns about the asset quality of banks.

Al Mal Capital expects the net profit of five banks it covers to decline by an average of 27.5 per cent from a year ago, and by 9.1 per cent from the first quarter of 2009.

Earnings for Emirates NBD, the country’s biggest bank by assets, are expected to drop by 36.8 per cent from a year earlier to Dh917 million, and by 27 per cent from the first quarter of 2009.

It expects Abu Dhabi Commercial Bank’s earnings to fall by 35 per cent from a year earlier to Dh405 million; National Bank of Abu Dhabi, down by 31 per cent to Dh691 million and Union National Bank earnings edging down by 25 per cent to Dh317 million. First Gulf Bank earnings for the period is expected to fall by a marginal 1.9 per cent to Dh793 million.

Another brokerage, Al-Futtaim HC Securities, expects Emirates NBD’s net profit to decline to Dh984.3 million, while earnings of Dubai Islamic Bank which partly owns Dubai-based property developer’s Deyaar Development, is seen plunging by 53 per cent to Dh350.7 million. EFG-Hermes expects Emirates NBD’s earnings to fall by 27 per cent from a year ago to Dh1.05 billion, while Abu Dhabi Commercial Bank’s earnings is forecast at Dh391 million, down by 64 per cent during the same period in 2008.

“The sizable drop in expectations is a factor of a tougher economic environment and continued buildup in provisions in 2009 compared to last year when regional economies were enjoying robust growth and strong liquidity,” said Deepak Tolani, equity research analyst at Al Mal Capital in Dubai.

In recent months, the continued concerns on real estate exposure, increased defaults, and limited transparency on exposure to stressed regional conglomerates, have been weighing on UAE banks. The slump in the real estate sector have raised defaults on mortgage payments, with banks reluctant to extend new mortage loans.

Al Mal Capital said it expects loan loss provisions of the five banks under its coverage to rise by 110 per cent from a year ago to Dh1.41 billion, and by 12 per cent compared to the first quarter.

“This is primarily due to the expected increase in non-performing loans due to the continued challenging operating environment, and continued stresses on real estate developers and personal balance sheets of consumers,” said Tolani.

Al Mal Capital said it expects UAE banks’ bottomline to take a hit, in part due to lacklustre loan growth in the first five months this year which grew by just 1 per cent to Dh100.36 compared to a robust 24 per cent growth to Dh893.9 billion in the first half of 2008.

Banks’ earnings during the period will be affected as tight liquidity and rising defaults also prompted banks to be very cautious about lending, said Al Dhafra Financial Brokerage head of investments Vyas Jayabhanu.

“Banks have to deal with a lot of toxic loans which led to reduced lending activities. Not one of the banks are aggressive in lending and that will reflect on their revenue and income.”

The gloomy outlook for banks is also a result of their perceived widespread exposure to the troubled Saudi business groups, Al Saad and Ghosaibi.

“For sure, some of the banks will already set aside provisions for their exposures, there is no clarity on that yet though, but that will add to some of these banks’ problems,” said Al Dhafra’s Jayabhanu.

· rocel@khaleejtimes.com