Fitch: UAE banks to extend strong performance in 2008

Similarly to the other GCC countries, the UAE banking sector continues to benefit from a buoyant operating environment, principally driven by high oil prices resulting in increased government infrastructure spending and general growth in both retail and corporate lending.

'Given that performances rely on core banking activities, and in the light of continuous strong demand for credit, we expect banks to perform strongly in 2008,' says Philip Smith, Senior Director in Fitch's Financial Institutions team.

Profitability was strong in 2007 with most banks enjoying double-digit growth in operating income. The sector has shown strong resilience to the international credit turmoil and the US sub-prime crisis, with most banks' profitability and capital ratios not being affected.

Despite sector loan growth of 40% in 2007 and strong growth in prior years, asset quality remained sound in 2007. However, impaired loans might increase as loan books season and if rapid growth continues, particularly in personal lending and real estate lending. Additionally, concerns persist about a possible property market bubble, high inflation and regional political tension.

Funding continued to be primarily sourced from customer deposits in 2007, although some bond issuance and syndicated loan agreements have taken place. Further issuance to diversify the funding base and reduce asset-liability maturity mismatch might happen in 2008, although this is subject to market conditions. Capital ratios have fallen for most large banks in 2007 but were still satisfactory. The implementation of Basel II in 2008 has typically resulted in a further slight decrease of capital ratios but these are expected to remain satisfactory at broadly the same levels.

The report focuses on 12 leading banks in the country, which accounted for more than 80% of the sector's assets at end-2007. Most UAE banks follow the concept of 'universal banking', aiming to offer the customer a full range of banking services from one source.

Emirates NBD (ENBD) is the largest bank in the UAE with approximately 21% and 19% market shares in sector assets and deposits, respectively, at end-2007. ENBD was formed in 2007 following the merger of Dubai-based banks, Emirates Bank International (EBI) and National Bank of Dubai (NBD). Further consolidation may take place in the UAE banking sector although it will be difficult to realise as most banks show healthy profitability, have closely held shareholdings and high valuations in local stock markets.