Lower interest rates, increasing competition cut banks' margins

ABU DHABI — The liquidity in the banking system is high on the back of oil revenues but the impact of lower interest rates due to the dirham's peg to the US dollar and increasing competition in the banking sector is reducing profit margins.

By Haseeb Haider

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Published: Wed 16 Apr 2008, 9:40 AM

Last updated: Sun 5 Apr 2015, 11:40 AM

"UAE banks tapped the overseas bond markets for medium and long-term funding in the recent past. However, with the ongoing credit crunch due to the US mortgage sector crisis has increased the overseas funding costs," according to a research report by The National Investor.

In the local market, banks are increasingly offering higher interest rates to lure deposits to secure wholesale and time deposits. Inflation continues to remain on the higher side and is likely to result in monetary/fiscal measures to rein in inflation which could possibly moderate growth.

On the whole, we are particularly bullish on the banking sector in general and Abu Dhabi banks in particular, added the report. Rent caps have not been instrumental in checking inflation. Falling US dollar has resulted in imported inflation and the high commodity prices will result in higher inflation rates in the near future.

Net profit: Structural and secular economic growth during the last few years has helped banks register strong growth in profits. Aggregate profits of all the listed banks in the UAE increased from Dh6.9 billion in 2004 to Dh20.0 billion in 2007, CAGR of 42.3 per cent for the period 2004-07.

Both core banking activities and fee-based income through capital markets related activities has resulted in robust profitability of UAE banks.

Attractive valuations: We expect core underlying banking income to remain strong for the foreseeable future on the back of favourable macroeconomic environment, record oil prices and benign interest rate scenario.

Government thrust towards providing further impetus to economic growth is likely to benefit the banking sector. We expect the assets of banks under coverage to grow at a CAGR of 20.1 per cent during 2007-2011E, the report said.

The banking sector is one of the biggest beneficiaries of the economic boom in the UAE. Favourable macro economic environment, along with increased government and private spending on infrastructure projects, have underpinned strong growth in the banking sector. In terms of asset size, the UAE has emerged as the largest in the GCC region. Until the end of 2005, UAE was only the second largest behind Saudi Arabia. The asset size stood at $335.6 billion in 2007 compared to $286.9 billion recorded by Saudi Arabia.

Foreign Assets: Foreign assets of the banking sector increased from Dh126.1 billion in 2004 to Dh229.3 billion. The contribution of foreign assets to system assets declined from 28.0 per cent in 2004 to 21.5 per cent.

Money supply increased from Dh304.2 billion in 2004 to Dh692.5 billion in 2007, a CAGR of 31.6 per cent for the period 2004-07. In 2007, the year-on-year growth in money supply was 36.7 per cent. Anecdotal evidence suggests inflation to be more than 10.0 per cent in the UAE.

Assets expansion: Banking assets of the UAE banks increased from Dh442.0 billion in 2004 to Dh1.232.7 billion in 2007, a CAGR of 40.8 per cent for the period.

The GCC region in general and UAE in particular registered robust economic growth during the last five years.

With a view to diversify its economic base, the region is on-shoring its own capital, which in earlier cycles was invested off-shore.

Deposits: Customer deposits of UAE banks increased from Dh312.0 billion in 2004 to Dh720.1 billion in 2007.

Aggregate deposit mobilisation grew at a CAGR of 32.1 per cent as compared to 40.8 per cent in case of system assets.



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