First Gulf Bank (FGB) kicked off the second quarter 2011 earnings season on a high note when it beat analyst estimates with a 13% year-on-year growth in profit to AED890 million (US$242.3 million). Its results were boosted by an 11% rise in core banking revenues to AED1.55 billion (US$422 million) and a 17% increase in net interest and Islamic financing income to AED1.22 billion (US$322.15 million).
Analysts reportedly estimated that the bank would register an average of AED885.3 million (US$241.03 million) in profit for the period.
The bank offers corporate and consumer Shariah finance via Siraj, its Islamic banking arm, but does not provide segmental reporting for the business in its quarterly reports. For the full year 2010, the bank’s Islamic financing amounted to AED5.77 billion (US$1.57 billion) against its net loans and advances portfolio of AED95.63 billion (US$26.04 billion), while income from Islamic financing stood at AED339.47 million (US$92.42 million) compared to interest income of AED6.24 billion (US$1.7 billion).
Despite the bank’s small Islamic banking business, its second quarter results are significant as a possible indication of what to expect from its peers. In addition to the positive second quarter 2011 numbers, the bank also booked record profits of AED1.77 billion (US$481.9 million) in the first half of 2011 and a 4% year-on-year decline in provisions for bad debt to AED870.06 million (US$236.88 million).
The results came as the market expected FGB to be among banks most likely to be affected by the Central Bank of the UAE’s new rules on retail financing, which came into effect on the 1st May this year, and amid projections from analysts that provisions will continue weighing down bank earnings this year.
Amid the continued uncertain environment following the recent financial crisis, it is worth looking at how FGB beat the odds this reporting season and whether its performance is a harbinger of better things to come from of the UAE banking sector.
Retail banking on the rise
In a statement accompanying the results, Abdulhamid Saeed, the managing director of FGB, said the bank is in a very strong position in terms of liquidity and capitalization and is on track to achieve its 2011 targets.
“Our balance sheet growth is a reflection of the improvement in the UAE banking sector indicators and increased stakeholders’ confidence. Our financial position and asset quality are improving every quarter. Success at aligning our strategies with new market realities has helped us steadily improve the overall financial performance,” he added.
Those “new market realities” include the central bank’s new limits on personal financing fees and a cap on the amount that can be advanced to individuals. The new rules seem to have already impacted FGB, as its loans and advances grew at a slower pace of 3.13% in the six months to June, compared to 4.21% in the same period in 2010.
The bank also acknowledged that its fees and commissions shrank 28% quarter-on-quarter and 18% year-on-year to AED291 million (US$79.23 million) in the period under review due to the regulatory changes. However, this was offset by the higher net interest and Islamic financing income it recorded during the period.
There may also be further hope for the bank to withstand the stricter rules. As of the first half of this year, FGB’s total assets of AED149.23 billion (US$40.63 billion) comprised AED61.63 billion (US$16.78 billion), or 41.3%, of corporate banking assets. While representing a slight decline from the AED62.71 billion (US$16.07 billion) recorded in the same period last year, this still makes up the majority of its financing portfolio.
In comparison, although retail assets grew slightly in the first six months to the 30th June this year from the previous corresponding period, at 24.18%, this still comprises just under a quarter of its total financing book.
Ahead of the curve
Another feather in FGB’s cap was a decline in its non-performing loans (NPL) ratio to 3.5% at the end of the period from 3.7% in the preceding quarter. Including its exposure to Dubai World, the bank’s NPL ratio stood at 4.3% in the second quarter from 4.6% in the first quarter of this year.
“In general, we see a declining trend in our NPLs and we are very comfortable with our level of provisioning,” said Andre Sayegh, the CEO of the bank, in a statement, adding that the bank’s lower provisions for bad debt “reflects the market reality”.
FGB has traditionally been ahead of the curve when it comes to NPLs, reporting 3.7% for the full year 2010 compared to the industry average of 8.3%. Hence, its standing may not be indicative of the wider industry’s asset quality position.
In addition, while the bank is forecasting lower NPLs going forward, industry observers such as Moody’s Investor Services projected in a recent report that UAE banks will still see rising bad debt as NPLs peak at more than 10% this year. As at the end of April this year, NPLs in the UAE were at 6.67%.
A rose among thorns?
Despite FGB’s better-than-expected results, its performance may not be indicative of wider industry trends. Furthermore, with its numbers showing a significant impact from new banking regulations in the UAE, this shows that even banks with a smaller retail customer base are not shielded from the stricter environment. On top of this, although FGB holds a bright outlook for its NPLs, the consensus is that UAE banking industry bad debt will continue to rise at least for this year.
What the bank’s numbers do show, however, is that even banks that are on a firm financial footing have to be wary of negative factors still weighing down the UAE banking industry. Sayegh said, “We would like to reiterate that we are confident that our economic growth targets for the coming quarters will be surpassed,” but only time will tell if FGB will emerge as a rose among thorns at the end of 2011.