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Tough Funding Conditions Likely to Affect UAE Banks

(Rocel Felix) / 25 August 2009

DUBAI — Growth in UAE banks is likely to be challenged by tough funding conditions, including rising loan defaults and a marked increase in provisions for losses, but their profitability levels will continue to be attractive, Goldman Sachs said.

The bank said in a report on Monday that despite significant support from local governments that boosted funding and capitalisation, UAE banks’ earnings could be curbed by future loan losses and funding constraints that could impair growth potential.

“Fundamentals have deterioated significantly and we forecast earnings to be severely affected by a high cost of risk, falling margins and funding headwinds.”

It said that the level of non-performing loans “is rising and may remain elevated for the rest of the year.”

Goldman Sachs has cut First Gulf Bank to ‘neutral’ from ‘buy’and cut its target price to Dh18.76 from Dh19.77, saying its high levels of loan loss provisions will continue to put pressure on the banks’ earnings growth in the medium-term.

National Bank of Abu Dhabi was downgraded to a ‘sell’ from ‘neutral,’ but its price target was raised to Dh12.12 from Dh11.04.  Union National Bank’s price target was cut to Dh5.84 from Dh6.20, but its ‘buy’ rating was maintained.

The Dubai Islamic Bank was upgraded to ‘neutral’ from ‘sell’ and its price target was raised to Dh3.21 from Dh2.79 due to the faster-than-expected growth of its international platform, particularly in Pakistan. The Abu Dhabi Commercial Bank was upgraded to ‘neutral’ from ‘sell’ and its target price was raised to Dh2.35 from Dh1.87 as its higher-than-expected growth in project and Islamic finance could add to Goldman Sach’s earnings estimates. Goldman Sachs kept its ‘buy’ rating of Emirates NBD, the country’s biggest bank by assets, and its  target price was raised to Dh5.71 from Dh5.35.

UAE banks’ shares have lagged  their global peers owing to their lack of visibility on the sector’s changing fundamentals, said Goldman Sachs.

“We do not expect UAE banks to start trading at a premium anytime soon” despite the steady support it has received from local governments, the bank said.

The other risks for UAE banks include the continuing pressure on real estate prices. Goldman Sachs also noted concerns over the fallout from the debt problems of  two Saudi conglomerates, the Saad Group and Ahmad Algosaibi & Bros., to which several UAE banks are exposed.

It said, however, that UAE banks’ total exposure is relatively small and that systemic risks due to credit quality is low, ensuring profitability to remain attractive. “Based on our revised price targets, UAE banks offer an average of 30 per cent potential upside.” rocel@khaleejtimes.com

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