Analysts predict a lacklustre earnings season for the UAE's bank, with the first reports starting to emerge this week.
New bank rules likely to affect earnings
The second quarter brought some of the biggest tightening to UAE bank operations in years and is unlikely to produce blockbuster earnings news as lenders report their results over the next few weeks.
Alongside a regulatory crackdown on risky lending to individuals, the takeover of Dubai Bank by the emirate's Government occurred during the quarter.
And there were continuing troubles at Dubai Group, where it emerged the amount of liabilities undergoing restructuring was almost twice the figure previously disclosed.
The result of this is likely to be constrained earnings at many UAE lenders, said Murad Ansari, a financial analyst at EFG-Hermes.
"This quarter is going to be pretty slow," he said. "Retail isn't a key area of growth, and overall lending to corporates has been subdued."
First Gulf Bank is expected to be the first to report second-quarter earnings when it reveals its results today.
The bank also announced plans for a sukuk programme to borrow up to US$3.5 billion (Dh12.85bn) in a prospectus released to the London Stock Exchange this week.
The biggest event in the quarter was the implementation of the Central Bank's new rules on retail lending, which came into effect on May 1 in an effort to curb excessive charges on personal loans and credit cards.
The Central Bank limited the fees on personal loans and capped the amount that could be lent to individuals. The UAE's listed lenders earned Dh2.3bn in fees in the first quarter, financial statements showed.
That income, excluding Dubai Islamic Bank and the Bank of Sharjah, which did not provide comparable figures, is expected to fall, but personal loan volumes and interest income could also decrease.
The implementation of the regulator's circular was delayed by one month, and lenders persuaded the Central Bank to implement a watered-down version that did not affect existing loans.
The new rules on lending are unpopular with some industries and among bank customers, who are unhappy with tightened access to credit. Car sales have fallen as a result of a 20 per cent down payment requirement on car loans.
Abu Dhabi Commercial Bank (ADCB) and First Gulf Bank are among the lenders most likely to be affected by the new rules, analysts from Deutsche Bank said in a research note.
"We expect a modest [quarter-on-quarter] decline in revenues, but this should be partially offset by a sequential improvement in risk costs," the analysts said.
"Looking ahead, we believe banks with less exposure to unsecured retail lending will experience higher growth than their peers, as will banks exposed to Abu Dhabi's public spending plans, while risk costs across the sector should decline as the pace of new loans impairment slows."
But analysts say provisions for bad debts are likely to remain a significant weight on earnings.
"Around 33 per cent of total income will likely be wiped out by provisioning in UAE [in 2011]," analysts from Credit Suisse said in a research note.
Many smaller banks have moved to capture market share from bigger lenders that continue to make large provisions for bad debts.