Mashreq, the nation's fourth-largest bank, reported yesterday that the global credit crunch had slashed more than Dh200 million (US$54.4m) from its investment income. The bank said "poor liquidity in the global and regional markets" was the primary reason that its investment income declined by 42 per cent in the last quarter to Dh287m from Dh497m. Massive loan defaults in the US from the mortgage subprime meltdown have led to a liquidity crisis and increased the cost of credit in global markets.
Many analysts are concerned that the reliance of local banks on international markets for investment and capital raising to meet the country's borrowing frenzy could cost institutions dearly. Although Mashreq's decline is related to credit investments, observers warn that the credit squeeze could spread to banks' lending businesses, because local institutions raise capital in the international markets, where the cost of capital has risen.
"Everyone keeps talking that we are disconnected from the subprime crisis; the fact is that we are not," said Deepak Tolani, an analyst at Al Mal Capital. "Even if you don't have subprime investments in your portfolio, the global credit crunch, the low interest rates in the US - all of that is going to affect local banks when they go to raise money in the market." For most UAE banks, growth in loans far outpaces growth in deposits, forcing them to raise capital in global markets. Mashreq, for instance, reported yesterday that customer deposits grew 17 per cent during the half to Dh52.6bn, but loans grew almost 58 per cent to Dh49.3bn.
The only bank so far to report that its deposits grew faster than its loans was Emirates NBD, the nation's largest bank. The UAE banking industry, however, has still turned record profits as the country's economy accelerates forward, and demand for banking products continues to climb. Mashreq said yesterday that its profits for the quarter jumped by 38.4 per cent from a year ago to Dh706.8m, and for the first half of the year it reached Dh1.17bn, about 23 per cent higher than the same period last year.
Strong growth in earnings from interest income and Islamic products, and a record jump in fees and commissions had fuelled the bank's asset and earnings growth, Mashreq said. Income from fees and commission registered a record growth of about 44 per cent last year. Net distribution of Islamic products to depositors grew about 67 per cent during the half to Dh896m. Mashreq's assets at the end of the half reached Dh94bn, about 33 per cent higher than last year's first half. Mashreq is the largest non-government-owned UAE bank.
It said that its expenses rose 32 per cent during the first half of the year because of investment in human resources, infrastructure and technology. The bank, based in Dubai, has opened seven new branches so far this year, reaching a total of 54 in the country. It also said it would expand Badr al Islami, its Islamic business arm, this year by opening 11 more branches. @Email:firstname.lastname@example.org