Global : Core earnings to lead growth in UAE banking sector
The oil price-led liquidity in the economy was a blessing for the UAE banking sector, which saw excellent growth in the last few years. Good times predominantly owed to the high credit and deposit growth on the back of relatively low interest rate environment, high oil prices and a flourishing economy. Consolidated assets of the banking sector grew by 41.9% to AED638.01bn at the end of 2005, thanks to the total credit growing by 43.0% to AED247.0bn on the back of strong economic growth. In terms of the size of the banking assets, UAE is second only to Saudi Arabia, which has aggregate banking assets of US$202bn as against UAE’s US$174bn at the end of 2005.
Banks in UAE primarily belong to two categories, national (local) and foreign, with the latter being restricted from operating more than eight branches. Currently, there are 46 banks operating in UAE, including branches and offices of foreign banks. There are 21 national banks in UAE, all of which are listed either on Abu Dhabi Securities Market (ADSM) or Dubai Financial Market (DFM).
Among the GCC countries, UAE has the second highest number of banks after Bahrain. On July 31st, 2006, Central Bank of UAE granted Saudi American Bank (SAMBA) and Doha Bank of Qatar a license to open a branch to carry-out commercial banking business in the UAE. With the opening of branches of these two banks, there will be representation of GCC national banks from all GCC Countries. Currently, the national banks present in UAE are National Bank of Oman, A1-Ahli Bank of Kuwait and National Bank of Bahrain.
Another notable feature is the rapid stride that Islamic banking has made in the UAE. A range of Sharia-compliant products was introduced in the market and Islamic finance deals like Ijara transactions have become common in property purchasing deals. The region has witnessed Islamic Sukuks attracting large investor volumes with subscriptions exceeding expected issuance, even in big issues. Due to surplus liquidity in the system on the back of high oil prices helped banks to strengthen their deposit franchise during the last two years. Total deposits (excluding government deposits) increased by 35.4% to AED306.54bn at the end of 2005, whereas increased by only 7.7% to AED330.22bn at the end of first quarter of 2006. However, the share of deposits in total liabilities declined to 44% in the 1Q-06 from 50.4% at the end of 2004.
Over the years, credit facilities have led the asset growth of the UAE banking sector. After a sedate growth in 2001, growth of total credit accelerated in the following two years. Cashing in on the favorable macro-scenario, total credit increased by 37.7% to AED394.89bn in 2005, with the credit to residents growing at faster rate by 43.0% to AED353.14bn. The total credit and credit to residents grew further by 21.4% and 22.5% in the first quarter of 2006.
The size of the banks under our coverage increased from AED265.99bn in 2004 to AED395.76bn in 2005, a growth 48.8% over the previous year. During the period 2002-05, asset size of the banks grew at a CAGR of 28.9%. In terms of size, the top three banks namely NBAD, EBI and ADCB contribute 50.7% of the overall size of the banks under review. Going forward, asset size of the banks under coverage is likely to register a CAGR of 17.5% over the next four years.
Deposits grew at a CAGR of 26.0% for the period 2002-05 from AED132.22bn in 2002 to AED264.71.5bn in 2005. In order to support strong loan growth in the banking sector, resource mobilization is the key. Most of banks have also started focusing on medium term notes as a way of increasing their funding base. We expect deposit mobilization to grow at a CAGR of 18.9% over the next four years (2005-09) for the banks under coverage.
Net loans grew at a CAGR of 33.7% for the same period. The net loan book increased from AED100.8bn in 2002 to AED241.1bn in 2005. In 2005, the net loans increased by 47.1% as compared to 2004. The growth on the consumer lending front is likely to slow down in 2006, but will still remain healthy for the banking sector. We also believe the banks will continue to witness strong lending requirements from the service and real estate sectors, especially the services sector. We estimate net loan portfolio of the banks under coverage to register a CAGR of 21.3% for the period 2005-09.
Profits of the banks under review, grew from AED3.47bn in 2002 to AED12.19bn in 2005 registering a CAGR growth of 52.1% for the period 2002-05. In 2005, profit growth was particularly stronger, as the all the banks witnessed healthy growth in fees and commission income due to the surge in capital markets. The fee income grew from AED2.28bn in 2004 to AED5.23bn, registering a growth of 129.9%. Net commission income, which is from core banking activities grew from AED5.79bn in 2004 to AED8.88bn in 2005, a growth of 53.4%. Profits for the banks under coverage is likely to register a CAGR of 12.0% on the back of 21.3% growth in net interest income and 7.2% growth in non-interest income.
The year 2005 has been a record year for UAE banks, as they were the most profitable thanks to the surging capital markets and IPOs tapping the market. The average return on average assets and return on average equity at 3.6% and 27.8% respectively reported in 2005, where as the average ROAA and ROAE in 2004 were 2.3% and 18.6% in 2004 respectively. Total non-performing loans of the banks under review amounted to AED4.04bn in 2005 as compared to AED4.72bn in 2004, which represented 1.7% of the banks’ aggregate loan portfolio at the end of year 2005 as compared with 2.9% in 2004. UAE banks average coverage ratio (PLLs-to-NPLs) was 116% in 2005 as compared to 97.1% at the end of 2004.
The first nine months of 2006 has not been very rosy for the UAE banking sector, like seen in the year 2005. This is primarily because of the reduced fee and commission income, which saw a decline during the first nine months due to the slow down in capital market activity. However, the income from core banking activities has been healthy during the first nine months of 2006 which further substantiates our view that core income is likely to drive earnings growth going forward. In the first nine months of 2006, the net interest income of the banks under review reached AED8.23bn as compared to AED6.23bn during the same period corresponding year, registering a growth of 28.0%. On a q-o-q, the net interest income of the banks under review was AED2.73bn in the third quarter of 2006 as compared with AED2.34bn during the same period in corresponding year, registering a growth of 16.3%. Net income for the UAE banks under review reported a marginal growth of 1.4% during the first nine months of 2006. (Global Research)