Standard & Poor's says lower oil prices will lead to reduced demand for new lending from companies
Profit growth at banks in the United Arab Emirates (UAE) is expected to slip to 5-6 percent in 2015 as macroeconomic challenges and the absence of big improvements in asset quality strangle lenders' earnings, Standard & Poor's said on Monday.
UAE lenders have enjoyed bumper earnings growth in recent quarters, aided by buoyant economic conditions locally, strong credit growth and the reduction in levels of cash set aside to cover bad debts.
In the final quarter of last year the top eight UAE banks by assets all reported year-on-year net profit growth of between 13 percent and 82 percent, building on successive quarters of strong growth earlier in the year.
However, lower oil prices are expected to feed through into reduced economic growth in the Gulf Arab state this year, which will reduce demand for new lending from companies and in some cases will increase default levels on existing debts, according to a report from the ratings agency.
This should trim sector-wide profit growth this year to 5-6 percent from 22 percent in 2014, with return on average assets dropping by 20-30 basis points from the 1.9 percent registered in the first nine months of 2014, Timucin Engin, the report's lead analyst, told reporters.
"It (lower profit growth) comes from two things: the deceleration of balance-sheet growth, so the revenue growth will not be as much as last year, and credit losses might increase slightly," Engin said.
Despite the subdued earnings growth compared with recent increases, UAE banks are unlikely to face a similar situation to the turn of the decade, when the bursting of a real estate bubble and debt problems at Dubai state-owned companies hammered the local economy and forced banks to set aside billions of dirhams to offset soured lending.
This is because the government companies are structurally stronger and have reduced debt levels. There is also less debt at the developer level in the real estate sector, which should prevent the level of defaulting seen at the end of the last decade, Engin said.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.