The UAEs banks have posted substantially increased net profits in 2014, but face a slowdown in growth this year as the low oil price sends jitters through the market.
Many of the banks saw their profits grow last year due to the improving quality of their assets coupled with increased lending.
The sector benefited from a buoyant economy which helped drive down banks bad loan volume as well as generate more lending opportunities for the banks.
If you look at 2014, most banks performed well. The credit growth continued to accelerate while credit losses continued to decline further for most banks. Deposit growth was strong and overall liquidity conditions were healthy given the strong deposit growth, Timucin Engin, director, financial services ratings, at Standard & Poors based in Dubai tells MEED.
The largest bank in the UAE, Emirates NBD, announced record profits of AED5.1bn ($1.39bn) for 2014, an increase of 58 per cent compared with 2013.
The bank saw its impaired loan ratio fall to 7.8 per cent and had been able to significantly mend its balance sheet due to reclassifying its exposure to the indebted conglomerate Dubai World as performing debt.
Dubai World is in the final stages of restructuring debt it accrued during the financial crisis 2008-09.
Dubai-based MashreqBank posted net profits of AED2.4bn, an increase of 33 per cent compared to the previous year. Its lending activity also increased, rising by 15.1 per cent to AED58bn.
Yet, the business environment for the banks is set to get far tougher in the coming months as the impact of continued low oil prices begins to affect the equity markets and wider UAE economy.
In 2015 we see a completely different picture and a reversal in that trend, says Engin, referring to the growth trajectory recorded in 2014.
The UAEs equity markets have been negatively affected by the oil decline. The Dubai Financial Market has declined from the highs recorded in mid-2014.
A potentially weakening real estate sector could also spark concerns about banks and their non-performing loan volumes.
Declining credit losses was an important driver for earnings in 2014 and we dont see that continuing in 2015, Engin says.
The banks are likely to become increasingly cautious about who and what they lend to as well, he says, adding that credit growth will slow to 6-8 per cent in 2015.
The sector is better prepared to weather any economic downturn that it was in 2008-09, with most banks having spent the past few years improving their capitalisation levels and putting aside significant provisions against bad loans.
We dont expect a sharp deterioration in the picture, but a gradual change, Engin says.
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