UAE banking sector likely to be subdued in 2012

Despite an apparent rebound in economic activity in the country in the latter half of 2011, the country's banks are still treading softly with regards to lending. According to the latest available figures from the UAE Central Bank, overall bank credit as of end-September 2011 reached Dhs998.4bn, a rise of just under 2% on the Dhs979.2bn recorded at end-September 2010.

Bank lending to the private sector remained flat at Dhs732.2bn as of end-September 2011, an increase of just 0.8% year-on-year, although lending to the public sector did rise 13.2% to Dhs196.5bn over the period.

While other Gulf economies are witnessing a boom in lending, having finally shaken off the uncertainties of the global economic downturn, the fate of the UAE's banking sector is still heavily intertwined with that of the global banking community, and so concerns over growth in the euro-zone, the US and China have stymied growth in the Emirates. The financial sector remains highly vulnerable to external shocks, and the ongoing debt refinancing obligations of various large private, government and quasi-government conglomerates contributes to the ongoing insecurity. As a result, analysts argue that banking sector growth is likely to be subdued in 2012, as confidence and therefore lending activity remains in short supply.

Neither the Dubai Financial Market (DFM) nor the Abu Dhabi Securities Exchange (ADX) enjoyed a positive 2011, as they suffered from declining turnover and trading value. The DFM General Index finished the year down 17% on end-2010, and the ADX lost 12% of its market capitalisation over the same 12-month period.

The DFM registered a trading value of Dhs32.1bn in 2011, down from Dhs69.7bn in 2010 and Dhs173.5bn in 2009; its trading volume stood at 25.2bn shares, down from 38.4bn in 2010 and 110.7bn in 2009. On the ADX, trading value recorded Dhs24.9bn in 2011, down from Dhs34.6bn in 2010 and Dhs70.2bn in 2009; its trading volume stood at 15.9bn shares, down from 17.6bn in 2010 and 37.6bn in 2009.

Leading figures on both bourses have indicated that a merger could help arrest sliding volumes and shrinking profits, and the executive chairman of the DFM confirmed that both bourses held discussions over a merger in February 2011. However, there have been no further updates on the prospects of a merger, and analysts expect both bourses to struggle again in 2012.

The country's initial public offering (IPO) market did at least come back to life in 2011, after two-and-a-half years of inactivity. Three companies listed on the Abu Dhabi Securities Exchange, the largest coming from real estate developer Eshraq Properties, which sold 55% of its shares to raise Dh825m.

The IPOs came after a succession of planned IPOs had been scrapped due to unfavourable market conditions following the 2008-09 global financial downturn and the 2009 Dubai credit crisis; of recent cancellations, the most notable was probably a planned IPO on Nasdaq Dubai by Axiom Telecom, which was scrapped in December 2010.

Market watchers - and participants - will hope that the listing activity witnessed in 2011 is sustained and even bettered in 2012. However, the ongoing troubles in Europe and elsewhere suggest it could be another rocky year for UAE stocks.