UAE Banking Sector Outlook
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Global Investment House of Kuwait released its latest report on UAE Banking Sector, outlining the major challenges ahead of the banking industry in the current economic environment, as follows:
Profitability likely to resuscitate in 2010
After profit decline in two consecutive years, keeping a realistic view, Global believes that the banking universe will be able to muster up a growth of 18%YoY in 2010, despite a slow-down in the top-line. Profits are expected to follow a stronger trajectory going beyond 2010, exhibiting a 4-yr CAGR of 26%. Profit growth could exceed expectations if Dubai World issues are resolved sans requirement for higher provisions.
Asset growth to remain subdued in 2010, eyes fixated at 2011
The recent cooling off seen in asset growth has earmarked the end of the era of supernormal growth in banking assets. Albeit forecasts see oil at a higher average price than that in 2009 and the year in progress to see a GDP growth of 2 – 3%, asset growth may remain in single digits for 2010 as banks adopt a cautious stance. Improvement is nevertheless expected beyond 2011 as the economy pick up pace and the general mood on the ground turns positive.
Asset quality woes to remain
Asset quality of UAE banks is anticipated to worsen by another 130bps in 2010 to reach 4.3%. A confluence of factors including expected changes in CBUAE regulations, shortfall in PV of future payments from restructured loans of DW and further delinquencies in retail and real estate segments, are expected to weigh in on asset quality. After peaking out in 2010, Global Investment House believes that asset quality will maintain status quo in 2011 and start improving in 2012 as loans growth resumes to healthy levels and outpaces NPLs growth.
Issues are plenty but issues are manageable
Global Investment House predicts 2010 to be a difficult year for the UAE banking sector as a whole, yet positivity does remain. As per the forecast, the banking sector is expected to show an increase in profits despite high provisions, culminating from the incorporation of DW debt, highlighting the fact that the current issues are manageable. Moreover, the CAR of the banking system as a whole stands at comfortable 19% as of 2009, further underpinning the robustness of the banking system.
Recommendation – Selective optimism
While Global Investment House remains cautious over the UAE banking sector for the time being, analysts believe that some banks, particularly those in Abu Dhabi offer attractive upside potential while operating in a safer environment. Stretching the horizon beyond the troubles seen in 2010, a healthy growth in the top-line, reduced provisioning requirements, robust earnings trajectory and attractive valuation multiples, outlines the top picks NBAD, FGB and UNB.

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