Despite a fall in earnings this year, a “promising forecast” and the onset of “true competition” is predicted for the UAE banking and finance sector in 2007, according to a research report by leading investment bank EFG-Hermes.
The study revealed that despite an end to stock market related earnings in 2006, the environment for core banking operations remains strong with 2007 looking set to be a year of growth for the sector.
The report found that by the middle of 2006 the industry witnessed the fall of IPO gains, asset management fees and income from available for sale securities. This in turn led to the depression of 2006/07 earnings growth and rapidly falling valuations.
However, it added that the operating environment for UAE banks would suggest a far more positive outlook for 2007. “The environment for core banking operations is extremely strong, based on solid economic growth, increasing financial penetration and with debt levels sustainable,” said Raj Madha, senior research analyst at EFG-Hermes. In a move that highlights the industry’s ability to adapt to demand, banks in the Emirates throughout 2006 focused on growing their core earnings, resulting in lending being a strong growth driver. To ensure that slower deposit growth did not become a constraining factor, most banks then launched multi-billion dollar medium term notes (MTN) programmes, the research showed.
Many banks however, are now beginning to focus on diversifying their revenue streams, and taking advantage of the cross-selling opportunities, said investment expert EFG-Hermes. The Egyptian-based bank said that this was not to suggest that banks are operating in a fiercely competitive environment. In a statement EFG-Hermes said that evidence from the liquidity boom of the past few years’ showed that regional banks “compete aggressively on volumes and incentives, but not on price”, and that competition was not true compared to the West.
“While the banks themselves seem to think that they currently operate in one of the most competitive markets in the world, we believe there are significant institutional reasons why this is not the case. The evidence from the liquidity boom of the past few years has been that the banks will compete aggressively on volumes and incentives but not on price,” said Madha.
“The only reason why returns on equity are good, but not conspicuously so, is that the banks are generally overcapitalised, make insufficient use of innovative financing solutions and have little service-related non-interest income. So far they have not needed to pursue these revenue streams.”
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