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Economic recovery lifts Emirates NBD’s business: Moody’s

Emirates nbd looks set to benefit from the strong economic recovery of Dubai and the bank is expected to further improve its profitability in 2014 and 2015, according to a latest report released by rating agency Moody’s Investors Service.

The UAE’s largest bank, with 16.9 per cent of total UAE banking assets, will reduce the ratio of its non-performing loans, or NPLs, to below 14 per cent in the next 12 months. The bank is expected to remain highly efficient over the coming 18 months, with a cost-to-income ratio at 35.7 per cent in 2013, down from 36.7 per cent in 2012, the rating agency said.

“We expect that the ongoing economic recovery will lead to further declines in Emirates NBD’s NPLs and support profitability. We expect the bank’s asset quality to gradually improve, owing to the improving Dubai operating environment and tightened lending regulations,” Olivier Panis, senior banking analyst at Moody’s Investors Service, told Khaleej Times.

Moody’s recently changed the outlook on Emirates NBD’s ratings — Baa1, D/ba2 — and its outlook from negative to stable as it expects the UAE’s strong economic recovery will benefit the bank’s credit profile in months to come. The ratings agency expects the UAE’s real gross domestic product to grow between 4.2 and 4.4 per cent annually in 2014-15, up from 3.3 per cent on average between 2010-12. The robust economic recovery is supported by continued public sector spending, particularly in Abu Dhabi, and strong signs of recovery in Dubai’s more diversified private sector.

“In Dubai, we expect the economy to continue to grow rapidly in 2014 and 2015, driven by core sectors such as tourism, logistics and trade, while the local real-estate market has also recovered, most notably in the residential and prime commercial segments,” Panis said.

“As core sectors register solid growth and the real estate sector recovers, we expect corporate and retail borrowers’ repayment capacity to improve and for recoveries on impaired real estate and construction exposures to increase.”

Panis said the ongoing recovery will enhance cash flows for many government entities like Dubai World and Dubai Holding, and it will support improvements in the bank’s profitability mainly through a reduction in provisioning and a lower cost of funding.

“As a result of this reduction in the cost of risk and funding, Emirates NBD profits have already started improving. Net profits rose 27 per cent between 2012 and 2013, reaching Dh3.3 billion [$0.9 billion], a level last seen in 2009, and we expect that this trend will continue in 2014 and 2015,” Panis said.

Emirates NBD is likely to achieve 11.67 per cent profit growth to Dh1.08 billion in the second quarter. — KT photo by Rahul Gajjar

Strong operations in key markets

Emirates NBD is a leading banking group in the region. It has operations in the UAE, Egypt, Saudi Arabia, Qatar, Singapore and the United Kingdom, and has representative offices in India, China and Indonesia. The group has a leading retail banking franchise in the UAE, with more than 220 branches and over 887 ATMs and CDMs in the UAE and overseas. The bank employes more than 9,000 people — representing 70 nationalities and held Dh347.1 billion ($94.5 billion) total assets as of March 31, 2014.

The bank, which reported a 25 per cent jump in 2014 first-quarter net profit to Dh1.04 billion on higher interest and fee income, is expected to sustain a double-digit profit growth in second quarter. According to median average of six leading lenders, Emirates NBD is likely to achieve 11.67 per cent profit growth at Dh1.08 billion in second quarter.

The Moody’s report said the tightening regulatory environment would also support the improving asset quality over time. The introduction of stricter consumer lending rules in 2011 and further regulation, introduced at the end of 2013, has restricted single-borrower and related-party concentrations and this should reduce the bank’s exposure to risks from economic shocks, the ratings agency said.

“We expect Emirates NBD’s well-established domestic franchise — with 16.9 per cent of system assets and 18.7 per cent of deposits as of year-end 2013 — will also continue to support the bank’s profitability. Although margin pressures in the corporate lending sector, and still significant provisioning needs, will continue to subdue the bottom line in the near term, the bank’s retail franchise remains strong, supporting access to low-cost sources of deposit funding, an efficient cost base and lending growth,” Panis said.

“We also expect the bank’s loss-absorption capacity to remain stable over the next 12 to 18 months, with a current Tier-1 ratio of 15.3 per cent as of year-end 2013, close to the UAE average of 16 per cent.”

The bank’s capital buffers is relatively modest compared to other UAE peers due to its high volume of zero-risk weighted government of Dubai exposures in Emirates NBD’s balance sheet, the high level of uncovered adjusted NPLs — at around Dh18 billion ($5 billion or 53 per cent of Tier-1 capital as of year-end 2013), and the concentrated exposures in the loan book.

Key drivers of profitability

About the key drivers of Emirates NBD’s profitability and their sustainability, the Moody’s report said the bank enjoys a strong franchise, specifically in the retail segment. The bank’s retail strength is supported by its long operational history in the country and its extensive branch network. The retail operations provide the bank with near zero-cost funding from customer deposits and better margins than in the highly competitive corporate lending market.

Conventional retail banking operations accounted for around 42 per cent of operating income as of December 2013, with corporate, Islamic banking and treasury activities accounting for the rest.

With a seven per cent compound annual growth rate, or CAGR, in deposits between 2009 and 2013, versus a three per cent CAGR in loans over the same period, the economic recovery is strengthening the bank’s funding with significant liquidity flows. During 2013, the bulk of the high deposit inflows (+12 per cent or Dh25.7 billion) was in near zero-cost current accounts and savings, predominantly held by retail customers.

“Such accounts increased in 2013 by 39 per cent to represent 53 per cent of total deposits as of year-end 2013 and are helping to maintain margins in a pressured interest rate environment. The cost of funding materially reduced from 2.4 per cent in 2010 to 1.1 per cent in 2013,” Panis said.

“Despite a large and growing branch network, we expect Emirates NBD to remain highly efficient over the coming 18 months, with a cost-to-income ratio at 35.7 per cent at year-end 2013, down from 36.7 per cent at year-end 2012. This is in line with local peers but compares favourably with the median of 54.2 per cent for global ba2 peers.”