The heady pace of profit growth at banks in the UAE is slowing as the cost of funds rises and a red-hot property market shows signs of cooling, according to analysts and industry observers. In the past two years, banks have posted record profits as rising oil prices have fuelled one of the biggest economic expansions in the region in three decades. Loan growth has reached record levels, due largely to the explosion in spending on public and private infrastructure and construction projects, and the boost they have given to the property market.
But in recent weeks, analysts have asked whether the property market may be in for a pause, if not a fall. The Central Bank of the UAE has begun enforcing regulations limiting the amount that banks can lend against their deposits in an effort to ease inflation and prevent banks from overexposure to the property market. In addition, the global slowdown has tightened credit for local banks looking to borrow in international markets.
The upshot: loan growth may already be tailing off, say some industry insiders. A senior government official, who asked not to be named because of the sensitivity of his position, said that under a new board of directors the central bank had been taking a higher profile in the sector. "I think they mean business as far as tightening the rules on the banking sector," he said. "They have talked to the banks about religiously respecting the loan-to-deposit ratio." Sanjay Uppal, the chief financial officer at Emirates NBD, the country's largest bank, agreed that the pace of loan growth would ease this year, mostly because it had been growing at such a phenomenal pace. He also predicted sectors such as the property market would slow because of new supplies hitting the market, and because of better government regulation. However, Mr Uppal said real growth - versus nominal growth - would be higher, as he predicted an easing in inflation.
Meanwhile, in a package of new regulations adopted last month by the Dubai Government, property buyers must pay at least 30 per cent of the price of the property before they can sell it. In another development, Abu Dhabi banks that have benefited from government deposits have found that they now have to compete for that business. Government agencies are now shopping for best deposit rates instead of bestowing business simply to help the institutions, the official said.
"The liquidity is there, but the new factor that was recently introduced is that now the strong source of liquidity, the Government, is saying: 'OK guys, it's there, but you've got to pay for it, you've got to be competitive, we are no longer favouring the domestic institutions versus foreign institutions'," he said. This, along with the way inflation has discouraged personal saving, has cut into the banks' cheapest source of funding for their lending business: deposits. In the first half of this year, the industry's deposits rose 37 per cent from the same period a year ago. Loans rose 56 per cent. To make up the gap, banks have increasingly turned to borrowing in the international markets to fund their lending business, but the global credit crunch has raised the cost of borrowing on international markets. Borrowing between banks rose about 45 per cent last month. In a note released yesterday, HSBC analysts said that the banking industry's exposure to property and a tight credit market could hurt the shares of several Abu Dhabi banks. HSBC lowered its target price on all the major Abu Dhabi banks it covers, downgraded its ratings on First Gulf Bank (FGB) for its overexposure to the property market, and warned about the slow growth of deposits relative to robust lending and lack of transparency in the property market. "We believe that 70 per cent of construction loans in 2007 went to the second tier development segment, which is the least transparent of the industry sectors," HSBC analysts said. The note said that first tier developers such as Aldar, Nakheel, Sorouh and Union Properties had low debt to equity ratios and relied less on bank loans than second tier developers to raise capital. Raj Madha, an analyst at EFG-Hermes, said that some of the lower tier developers could default on their loans to banks. He said rising provisions by banks in the last quarter showed that banks were predicting that default would pick up. HSBC also said that FGB and Abu Dhabi Commercial Bank (ADCB) may have closed the avenue to another source of funding, convertible bonds.