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Sun 30 Oct 2016 05:08 PM

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UAE banks braced for further profit drops in 2017, says Al Ghurair

Loan growth to slow to 3.5% as lending viewed as increasingly risky

UAE banks braced for further profit drops in 2017, says Al Ghurair

UAE banks will see a 10-20 percent profit drop for 2016 and a similar outlook next year, according to UAE Banks Federation chairman Abdul Aziz Al Ghurair.

The UAE banking sector is expected to see continued adjustments as the economy slows and declining oil prices and tourism numbers take their toll on business activity.

“We are no different from the economy, so the sector has slowed down during the year and that is reflected in its performance. [Banks’] profits will come down by anything from 10-20 percent this year,” Al Ghurair told media on Sunday.

The 2017 profit outlook will either be flat “or plus or minus 5 percent”, he added, while loan growth is expected to drop from 4.5 percent last year to 3.5 percent based on the UAE’s projected 2 percent growth for 2016.

Al Ghurair said the UAE’s banking sector is in a stronger position than that of Europe, Japan and the US, for example, because its ratios look “really fantastic” – 16.5 percent capital adequacy above a 12.5 percent minimum ratio set globally. He also said a degree of correction in the market was healthy as it would “weed out the poor performers and produce better ones”.

However, he warned that general liquidity would remain under pressure for the next few years due to forthcoming regulations that are set to raise costs for banks.

For example, IFRS9 – an International Financial Reporting Standard set to be introduced in January 2018 by the International Accounting Standards Board – will place new requirements on banks to ‘risk rate’ each new loan and make an immediate provision for that.

This will raise lending costs for banks and make it harder for all but “top notch” customers to secure financing, Al Ghurair said.

“It’s going to be a little bit expensive doing banking because every loan is going to be made with its own provision depending on the risk rating. The higher the risk, the higher the provision you have to book immediately.

“It’s going to be tough and banks will be extremely selective, because, you know, if I make a 2 percent spread over EIBOR (Emirates interbank offered rate) and it’s a higher risk customer I may have to put a 5 percent provision for that account, which means I don’t make money.

“This is going to change things. IFRS9 will have an impact on banks’ profitability and force them to ask only for a secure, high quality balance sheet. For customers, will they have access to the easy money they had in the past? Maybe not. Maybe only the top notch customers will have access to easy money.”

Al Ghurair said in general the flow of bad loans had slowed down dramatically across the industry but would never be “zero”.

“It’s part of life,” he said. “If you don’t want to have an accident driving then don’t drive.  I know that, in your lifetime, if you drive a car you will make an accident – small or large – and lending is like driving. There is always risk. It’s when it gets out of control, then it’s not acceptable.”

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