BMI View : We continue to hold a relatively cautious outlook for the commercial banking sector in the UAE as growth will be tempered by deleveraging ahead of the 2014 funding cliff. There is a significant divergence between the outlook s among the emirates with the housing market in Dubai looking more attractive than Abu Dhabi. Overall, we forecast loan growth to come in at 6.0% in 2013 and 9.0% on 2014.
We hold a modest outlook on the growth prospects for the UAE's banking sector as growth is restrained by a funding cliff due to occur next year . According to latest data from the Central Bank of the UAE, total loans increased by 5.2% y-o-y in May, marking the highest level of growth since October 2009. We expect loan growth to average 6.0% in 2013 and 9.0% i n 2014. Whilst this is a notable improvement on 2012 and 2011 where growth came in at 5.5% and 2.6%, respectively, it is still far away from the average 28.2% rate of growth posted between 2001-2008. This is not necessarily a negative forecast for the sector and indicates more sustainable growth which should reduce the likelihood of another property crash. In terms of deposits, we forecast growth of 13.0% and 8.0% in 2013 and 2014, respectively , compared with 9.2% in 2012.
|Convergence To Continue|
|UAE - Credit Growth by Activity, % y-o-y|
After protestations by commercial banks, the UAE's Central Bank agreed to delay introducing caps on mortgage lending and loans to government related bodies. The caps will limit on mortgages at 75% and 80% of the property's value, for foreigners who are first-time buyers and UAE nationals respectively. The ratios for any subsequent home purchases would be 60% and 65% for expats and locals respectively. We expect the caps will be implemented over the course of 2013 and add to the regulation to prevent another property boom and bust.
|Growth Picking Up Slowly|
|UAE - Banking Sector Loans|
Deleveraging To Continue
As we have highlighted on numerous occasions, 2014 is likely to be a difficult year for UAE banks, as a significant amount of debt is due, with estimates by the IMF showing approximately US$30bn in liabilities set to mature in Dubai alone. As the experience of the past several years has shown, the local banking sector has borne the brunt of debt restructurings (while bondholders have been repaid in full), which is a policy we do not expect to end as the funding cliff approaches. It is important to keep in mind that for all of the renewed optimism surrounding the UAE's macro outlook, there are still considerable underlying structural weaknesses throughout the economy which are sitting on banks' balance sheets.
Over the past year banks in the UAE have started deleveraging in earnest, repaying the millions in dollars of government support that they received back in 2008 at the start of the global financial crisis. Helped by lower borrowing costs , some of these banks have been able to successfully tap international debt markets since the start of 2013 to help repay these loans. Abu Dhabi Commercial Bank raised $750 million through a Tier 2 bond in March and First Gulf Bank repaid its Dh4.5 billion (US$1.22bn) Tier 2 funding line from the Government in full.
|Growth To Moderate|
|UAE - Banking Sector Deposits|
Improvement In Housing Outlook
T he UAE real estate sector is only now appearing to have regained its footing following a multi-year decline . According to the property firm Asteco , average apartment rents in Dubai rose by 2 0 % y-o-y in Q2 13, while the average price of a villa in the emirate increased 17 %. To a certain extent, the sector's more buoyant outlook can be seen in the recent uptick in credit growth to the construction industry, which came in at 9. 1 % y-o-y in March 201 3 , compared to an average 4.2% in 2012 . It is clear that sentiment towards the residential real estate market has turned the corner . It is important to note that there is significant divergence between the two largest emirates with the housing sector in Dubai looking like it has bottomed, whilst oversupply in Abu Dhabi will keep the lid on prices for some time.
|Liquidity Still Ample|
|UAE - 3-month Emirates Interbank Offered Rate (%)|
Liquidity in the UAE's banking sector continues to increase with the three-month Emirates Interbank Offered Rate (EIBOR) dropping to 0.9114 (compared with 1.3000 at the start of 2013). This marked one of the lowest levels since May 2004. The sharp drop in interbank borrowing rates is explained by the decline in London's Interbank Offered Rate (LIBOR), which EIBOR has historically tracked quite closely. Furthermore, the exceptionally loose monetary policy out of the US has also put downside pressure on rates. Despite this ample liquidity however, loan growth remains slow as deleveraging throughout the private sector continues apace. We expect most of the losses are now behind us and we will likely see gains, albeit modest, due to increased expectations for higher US rates in the coming quarters.