Abu Dhabi's banking sector is healthy despite a second quarter drop in profits for many of the emirate's banks.
Observers see second quarter results as a blip and point to long-term growth in banking. Jeremy Parrish, the CEO of Standard Chartered in Abu Dhabi and Al Ain told OBG, "If you strip out initial public offerings (IPOs) and trading profits on the equity book that made a lot of money for banks last year and look at underlying core earnings in 2006 compared to 2005, most banks will be ahead. So you need to look through the blip in 2005 and try to see the long-term trend."
Recently published figures for most banks suggest a poor performance in the second quarter of 2006 compared to 2005. Apart from the decline in IPOs and stock market related income, some banks were hampered by their large investment portfolios. Overall, the Abu Dhabi Securities Market slid 20.6% in the second quarter.
Akber Naqvi of Daman Securities told Gulf News, "The results depend a lot on the trend in the market itself. In general, the lack of investor confidence has had a great influence on the market and when that will change is hard to say." Indeed, it has been suggested that this trend may well be sustained in third quarter results as share prices could be subdued by this lack of investor confidence in the UAE and the war in Lebanon.
"The banks have a lot of exposure to the market and have still not restructured their balance sheets, which makes them vulnerable," according to Krishna Murthy, chief executive of the financial services division of Al Rostamani Group, who was speaking to Gulf News.
In the second quarter, profits dropped for both the National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, while Abu Dhabi Islamic Bank was one of the few banks that recorded gains.
However, core earnings were up by approximately 20-30% for banks across the sector in the UAE aided by personal loans and lending to business. Abdul Aziz al-Ghurair, CEO of Mashreqbank told local reporters, "We have been warning for some time that the exceptional profit growth generated by the UAE banking sector in 2005 was not sustainable in the long run, and we have seen a return to a more normal environment in 2006."
Indeed, most banks do not appear to be discouraged by these results as it appears that many foreign banks see Abu Dhabi as a growth area and seek to step up their presence in the emirate. UK banks such as Lloyds TSB, Royal Bank of Scotland, Barclays and Standard Chartered are seeking to increase their local visibility whether through branches or retail visual identity.
As Abu Dhabi seeks to expand its non-oil GDP, several banks are eager to support the government's industrial and economic diversification plans. A visible element of this is the finance being provided for development and expansion projects in several fields. Recently a consortium of 22 international, regional and local banks provided Etisalat, the Emirates Telecommunications Company, with a $3bn revolving line of credit. International players such as HSBC, Standard Chartered and BNP Paribas were involved alongside local companies such as Abu Dhabi Commercial Bank.
Barclays Bank also recently signed a Dh300m ($81.7m) loan agreement with Abu Dhabi based Aldar Properties to fund one of the real estate developer's new projects. This agreement is the first by an international bank in the real estate sector in the emirate indicating the growing confidence of overseas banks in Abu Dhabi's development plans.
Meanwhile, Abu Dhabi National Oil Company (ADNOC) has recently announced, for the first time, that it is seeking about Dh16bn ($4.36bn) in syndicated financing from banks for its expansion plans and it has been confirmed that at least three Abu Dhabi banks have bid to be mandated lead arrangers.
Abu Dhabi's banks appear to have confidence in the expansion plans of the government and the emirate's major companies.