News Column

Banking sector looks more optimistic and the provision cycle seen peaked

June 11, 2014

Babu Das Augustine Deputy Business Editor


Increased interest in Islamic banking and rising investment in banking technologies will be key trends in the UAE's banking industry this year according to the annual report of UAE Banks Federation (UBF)

"Islamic trade finance could provide new opportunities and become the preferred choice for emerging rapid growth markets (RGMs). Technology has been identified as a key sector for investment by the UAE government as part of its diversification and development strategy, and it is driving much change in the banking sector," the report stated.

According to market research 76 per cent of bank customers in the UAE registered for online banking between December 2012 and May 2013, while 72 per cent used credit cards and 32 per cent used Islamic banking validating these two trends in the industry.

The report said the banking sector looks more optimistic and the provision cycle peaked last year. "Money set aside to cover bad debts dwindled at the UAE's biggest lenders as the global financial crisis faded from view and top bankers felt more optimistic about the strength of the local economy," the annual report stated.

The UBF expects credit growth to pick up pace this year with retail lending growing more than six per cent. Analysts are also predicting overall credit growth will see a double-digit expansion with nominal credit expected to remain in the range of 10 to 12 per cent in 2014 and 2015.

Banks are expected to have another year of strong financial performance. The key risk factor to watch over the next 24 months will be developments relating to certain large restructured transactions. According to a recent report from Standard & Poor's the potential non-payment of these [restructured] debts could increase some banks' provisioning requirements, thereby reducing their profitability.

Still the credit-rating agency feels that asset quality will continue to improve, although the cost of risk is unlikely to reduce further. They suggest that banks' robust funding levels and good-quality capital should help them withstand adverse market developments, such as tighter liquidity and higher funding costs.

The UBF's annual l report said banks are cooperating with the Debt Settlement Fund, the government's initiative to reduce the seriousdebt that some UAE nationals have, and these efforts will have the support of UBF.

"We encourage member banks to cooperate in this scheme. Furthermore, we are working towards raising financial literacy among the population and to promote financial inclusion across the country," said Abdul Aziz Abdulla Al Ghurair, Chairman, UAE Banks Federation.

The bankers' body said economic developments such as winning the Expo 2020 bid has provided the UAE economy with the boost it needed to tackle the future. Analysts estimate that the event will add about Dh84 billion- approximately 24.4 per cent of the GDP to the local economy between 2015 and 2021.

"Confidence in the industry is improving. It certainly seems that 2014 is primed to be favourable for both the banking industry. With a positive outlook ahead and a multitude of encouraging signs, the industry in the UAE looks set to grow at a steady and measured pace," the UBF report stated.

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Source: Gulf News (United Arab Emirates)

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