Bad debts continue to weigh on UAE banks in H1

Impairments for bad debt weighed on the profitability of banks in the United Arab Emirates during the first half of 2016, with several lenders posting an increase in provisions when compared to the same period last year.

Mashreq Bank, Dubai’s third-largest lender by assets, posted a 17 percent year-on-year (YoY) drop in H1-2016 net profit, as its net allowances for impairments nearly doubled to AED 832 million.

Abu Dhabi Commercial Bank (ADCB), the emirate’s second largest bank, saw its net profit drop 15 percent over the same period, citing an increase in impairment allowances reflecting “market conditions.”

Earlier this month, the UAE Central Bank revealed in its latest quarterly report that banks were less willing to extend loans to corporations and small businesses during the second quarter of the year.

“The ongoing tightening of credit conditions for corporate and small businesses is likely due to the reduced willingness to extend business loans among financial institutions, reflecting a reversion of conditions towards a slower growth path," the central bank explained.

Abu Dhabi-based Union National Bank (UNB) and Commercial Bank of Dubai (CBD) recorded profit drops of 22 percent and 20 percent YoY, respectively, in H1-2016, as impairments charges rose.

Meanwhile, Abu Dhabi Islamic Bank saw credit provisions rise 19 percent over the same period.

The first set of financial results confirmed the view among many analysts that tighter liquidity and a slowing business environment in the UAE would continue to limit profitability and credit growth in the banking sector.

Dubai-based Arqaam Capital had forecast that the sector’s bottom line would fall 3.5 percent YoY in Q2. Growth among banks is seen to remain soft amid a challenging macro environment, the brokerage firm said in a research note. Net interest margins (NIM) and non-net interest income are also expected to slip across the sector in Q2.

Shabbir Malik, banking analyst at EFG-Hermes earlier told Argaam that liquidity constraints still remain an issue among banks in the country as oil prices remain low.

“SME provisioning is likely to be high. We expect an increase in provisioning in the retail segment due to layoffs in oil and gas, banking and contracting sectors,” he explained.

Going forward, smaller lenders may come under more pressure after National Bank of Abu Dhabi National Bank (NBAD) and First Gulf Bank (FGB) complete their potential merger.

The planned merger “will make it more challenging for smaller banks to compete and this could pressure them to merge,” he added.

Write to Joumana Saad at joumana.saad@argaamplus.com