The banking sector in the UAE, not dissimilar to all other sectors in the Emirates, has been capitalizing on robust economic growth at the federal level.
Nominal GDP growth of 17.5% in 2004 and an estimated acceleration to 22% in 2005, compounded by a continuation of double digit expansion projected for this year has in turn been driven by an influx of petrodollars, fiscal expansion on the state level, and a private sector boom on the back of a favorable interest rate environment catalyzing consumer spending.
• The recent ample liquidity status has been reflected on the macro level
in M2 growth of 24% in 2004, double the 2001-2003 12% CAGR, and aggregate banking sector asset growth of close to 23%, versus a 2000-2003 CAGR of 9.8%. Sector momentum picked up further over 9M FY05 ending September, with banking assets expanding an additional 35% to settle at AED497.5 billion. Domestic credit facilities continued to drive growth, leaping 39% annually, in turn fuelled by claims on the private sector of AED267 billion, of which loans and advances pertained to 91%.
• The sector going forward, post FY05 results, will prove unable to sustain earnings momentum witnessed over the past couple of years. However, even in the absence of the equity market catalysts the sector has been afforded as of late, significant future growth potential is evident in our view on the back of;
• A medium term continuation of the real estate boom, with 18% growth in credit to the construction sector over 2004, compounded by an additional 9% expansion over 9M 2005, excepted to pick up further over the coming period, with aggressive acceleration foreseen in the capital in particular. An underdeveloped mortgage market is also projected to take off with credit to real estate mortgage loans up 41% y-o-y for the period ending September 2005, in conjunction with sector liberalization, regulation and a recent focus on development of securitization practices.
• A significantly underserved retail market positively correlated to the increasing expatriate numbers and regional demographics. In short this segment’s significance as a popular alternative to both diversify revenue streams and improve margins is gaining ground, as are lucrative private banking/wealth management practices which are increasingly contributing to operating profits.
• An Islamic Banking market, which although in its nascent stage, is outpacing conventional banking performance in some arenas, most notably the retail loan and deposit market, with industry specialists projecting future growth of 29% and 16% per annum, respectively over the coming 4 years.
