x Abu Dhabi, UAESunday 21 January 2018

Gulf banks poised for earnings growth

Markets Update: With UAE earnings season in full swing, analysts are turning towards the banking sector for firm signs of growth.

National Bank of Abu Dhabi is due to report earnings on Tuesday. REUTERS / Jumana El Heloueh
National Bank of Abu Dhabi is due to report earnings on Tuesday. REUTERS / Jumana El Heloueh

With UAE earnings season in full swing, analysts are turning towards the banking sector for firm signs of growth as investors cross their fingers for a repeat of the sector's past bumper dividend payouts.

Full-year results for Arabian Gulf companies are set to increase again, with a strong fourth quarter expected to follow what has already been a good year for corporate earnings, analysts from Kuwait's Global Investment House wrote in a research report.

"The GCC region's corporate earnings grew 6.9 per cent year-on-year during the first nine months of 2012, and the region is set to report another year of earnings growth," the report said.

The Dubai Financial Market General Index advanced 1 per cent last week to 1,774.92, while the Abu Dhabi Securities Exchange General Index gained 1.3 per cent to 2,765.82 during the same period. Both exchanges closed their fifth consecutive week of gains, with the DFM index now up 10.4 per cent since the start of the year.

Bank stocks underperformed the gains made on both exchanges last week. National Bank of Abu Dhabi is due to report earnings on Tuesday and will announce whether it plans to raise funding through a new convertible bond issuance, while Emirates NBD, the UAE's biggest bank by total assets, is due to release numbers on Thursday.

Dubai's financial services sector has made a poor showing so far on the earnings front, with both Tamweel and Commercial Bank of Dubai (CBD) undershooting analysts' estimates. However, CBD announced a substantial dividend equal to two thirds of earnings.

That payment recalled First Gulf Bank's payment of a Dh1.5 billion dividend payout last year. Analysts are hoping for a repeat when the bank reports earnings this year.

Dividend yields of above 5 per cent were one of the key factors attracting international capital to the region's equity markets, according to a report from Deutsche Bank.

"Dividend payouts have been consistently rising for most of the countries in Mena," said the report.

"Most of the Mena markets possess the requisite financial strength in terms of adequate profitability, sufficient cash flows and sound balance sheet to back high dividend yields and payouts."

Dividend payouts are becoming increasingly important to yield-starved investors seeking to generate returns. Across the world, a combination of historic low interest rates and unconventional monetary easing from central banks, such as bond-buying programmes, have pushed down yields first on sovereign debts from highly-rated countries, and then investment grade corporate credit as a result of a flood of liquidity. Bond yields move in the opposite direction from prices.

Speculative-grade or "junk" bonds and emerging market bonds have also registered substantial declines in yield, allowing some governments to take advantage of cheap funding from markets.

This week, Dubai's Government launched a $750 million 10-year sukuk which will pay a coupon rate of 3.875 per cent, a lower rate than the Italian government currently pays on its debts.

Investment banks hope the deal could augur further bond sales by Dubai-based companies. Emirates Airline and Dubai Electricity and Water Authority are both expected to raise capital from bond markets.

How long the easy access to cheap funding for Gulf borrowers will persist is uncertain.

The European Central Bank (ECB) has begun early efforts to tighten monetary policy through a winding down of emergency funding lines.

The ECB said that banks would repay €137.1bn on Wednesday of the €489bn of emergency funding which was granted to lenders at the time.

Saudi markets began the week on a cautious note, with the Tadawul All-Share Index advancing 0.39 per cent to 7,025.30.

Although potential for global growth to stumble during the first quarter remains, there were growing reasons for optimism, according to estimates from Goldman Sachs.

"Our forecasts see an acceleration in growth in the second half of the year, earlier than the pattern of recent years would imply," analysts from the investment bank wrote in a research report. "The fact that oil prices and the euro sovereign crisis have been more contained lately also provides some support for that view."