UAE banks have yet to announce their full-year financial results for 2015, but it is likely the numbers will show a slowdown in the country’s economy is biting into their profitability.

While the banks frantically put the numbers together to present the best possible picture of their financial performance, jittery shareholders wait in the wings to hear the news on dividends.

It is usually the time of the year when shareholders and investors get some sort of guidance from the banks on what would be the possible payout for them.

This year, however, they will have to wait longer to know what return they will get, if any, on their investments as the UAE central bank has barred lenders from directly announcing proposed dividends to the markets or the shareholders.

Verbal direction

No formal circular has been issued to restrict announcements from banks. The regulator has instead chosen to verbally direct them on the subject, two bankers and a market source aware of the matter told MEED on 5 January.

“It is a verbal order, but it is there and I don’t think any bank will breach it,’’ said one of the bankers, who asked not to be named. “Dividend announcements are restricted and they will only be announced when the central bank clears them.’’

Financial results of banks and distribution of dividends to shareholders require central bank approval in the UAE. However, financial institutions traditionally informed the markets about the dividends proposed by their boards, saying the intended payment was subject to final approval by the central bank.

That gave the markets an indication about the possible payout, raising expectations among shareholders, who anticipated payments of proposed ratios without any changes from the central bank.

A central bank official did not respond to phone calls and emailed request for comments.

Previous announcements

The banking regulator had allowed the practice to continue in the past and did not make major adjustments to proposed dividends, the second banker said. The boards usually took into account what they needed to retain and what they should distribute in dividends, depending on the future requirements, before proposing and announcing dividends.

This year the central bank wants it changed and have more control on the process from the beginning, he added. “This way the central bank has a bit more leeway and if it thought a certain bank should retain more of its profit for whatever reason, they can direct them to reduce the proposed dividend.’’ 

By allowing announcements of only the approved instead of proposed dividends, the regulator is pre-empting the chances of stirring unnecessary controversies if it decides to make major changes to payouts proposed by a financial institution, the banker said.

“It will be embarrassing for the bank if the regulator decides to adjust the proposed dividend given the current economic situation and liquidity requirements,’’ Wadah al-Taha, a Dubai-based market analyst said. Pre-approval of the dividends “is also an effort on the part of the central bank to prepare the banking system for implementation of Basel III,’’ he said.

The central bank at the peak of the 2008 financial crisis had restricted the banks from distributing more than 50 per cent of their profits in dividends. This year the regulator will carefully analyse the financial strength of each bank and will advise on the dividends in light of slowing deposit growth and the sputtering economy, according to Al-Taha.

Deposit growth

The overall deposit growth in the UAE has also slowed down “markedly” in the 12-month period ending in November 2015 to just 2 per cent. Private sector deposits grew by 5.4 per cent while the government sector experienced a negative growth rate of 6.3 per cent in the first 11 months of 2015, according to the Monthly Outlook published on the central bank’s website in December.

Loans, on the other hand, rose by 8.1 per cent for the 12 months ending in November. The fastest growth was seen in government-related loans, which rose 10 per cent in the first 11 months of last year. However, this sector represents just 11 per cent of the total loans outstanding. The private sector accounted for almost 70 of the total loan volume, which grew by 8.3 per cent, according to the central bank.

The mismatch in loans and deposit growth means dividends are not the only thing under the central bank’s microscope.

The regulator has also ramped up pressure on other fronts, asking banks to maintain permissible limits in various ratios such as the eligible liquid asset ratio, the advances-to-stable-resources ratio and the loan-to-deposit ratio – some of the indicators of a lender’s financial health.

Tightening liquidity

Scrutiny of financial institutions has intensified as liquidity in the UAE banking system gets tighter. The price of crude – the sale of which is the major source of income for the oil-exporting country, especially, Abu Dhabi – has dropped to new 11-year lows in recent weeks. Proceeds from oil have been the most stable deposit base for the banks, but these are quickly depleting as the government has been withdrawing funds in order to meet the shortfalls.

National Bank of Abu Dhabi (NBAD), the largest bank in the UAE by assets, was among the worst hit. Government deposits at the lender dropped by $13bn. NBAD’s CEO, Alex Thursby, said in October that the UAE banking system as a whole has lost about $15bn in public sector deposits from September 2014 to September 2015. Outflow of government funds in the last quarter of 2015 is not known.

With oil prices showing no signs of recovering to above $100 a barrel in the foreseeable future, it is unlikely the banks will see the lost government funds coming back anytime soon to prop up their balance sheets.

For lenders that have enjoyed years of ample liquidity on the back of abundant petro-dollars, the only other way to replace the lost funds has been to look for corporate deposits. They fought aggressively for these in the last six to eight weeks of 2015, even for short-term deposits, to meet the regulator’s liquidity and deposits requirements.

First Gulf Bank (FGB) has secured a $1bn deposit from Dubai-government controlled Emirates airline. The lender was among several UAE banks that competed for the deposit, two bankers familiar with the matter told MEED on 31 December.

Emirates keeps nine months of working capital in cash for contingencies, and invited lenders to offer their best interest rates for placing deposits with them.

“What happens at Emirates is that there is effectively a bidding war. The highest bidder takes the deposit,’’ one of the the bankers explained, adding that clients such as Emirates, with ample funds to place, were in a position to get better rates as banks were quite eager to grab their deposits.

Spokeswomen for FGB and Emirates declined to comment.

Increasing competition

FGB is not alone in the pursuit of deposits. United Arab Bank, Commercial Bank International and Emirates Islamic have also joined the fray, actively seeking to boost their deposit base.

NBAD, however, has chosen not to be part of the expensive hunt in the local market and is focusing overseas to secure deposits. This has helped the lender offset some of the outflows of the government and public sector funds, NBAD’s group treasurer Steve Jordan said in an emailed statement to MEED.

“NBAD has no intentions to participate in this pure pricing-based competition and did not do so even in the times of the post-2008 financial crisis,’’ he said.

It does not matter whether the banks have scoured domestic or international markets, the hunt for deposits will continue throughout 2016. Economic conditions in the domestic markets are not expected to radically change as experts predict this to be another tough year for oil prices.

The best strategy for banks, perhaps, is to grab longer-term deposits as early as possible to avoid another aggressive run to the finish line like in 2015.