UAE Commercial Banking Report Q3 2007

We are standing by the real GDP forecasts we ran in our last Business Forecast Report for 2007 and 2008, although our longer-term projections are slightly lower, due to a small change in methodology and the risk to the non-oil sector from a construction/real estate slowdown. In spite of several warning signs from the property market, and serious (related) upside risks to inflation, the financial sector is booming, and government and private consumption should spell another year of strong expansion. We see real GDP growing by 7.8% this year, before slowing to 6.0% in 2008. Thereafter, we see a slowdown to 4.7% in 2009, 4.2% in 2010 and 4.4% in 2011 (on the back of a fillip in both oil and gas production).

We see oil GDP actually contracting slightly in real terms this year (-1.27%), although gas production growth of 9.10% will pull overall hydrocarbon expansion back into positive territory. Gas is certainly a key growth area, with expansion over 4% pencilled in by our industry team for the remainder of the forecast period, although revenues are dwarfed by oil.

However, non-oil growth is clearly powering the economy as a whole in real terms (although still high prices will boost the energy sector in nominal terms). Not only does it account for 73% of total GDP (as of 2005), but it is growing at a faster rate as well. We see it expanding by a real 10.5% this year, slipping to 7.1% in 2008, 5.5% in 2009 and then finally ending the forecast period at a still robust 5.0%. This slight downturn reflects the lower oil prices we have priced into our forecasts: although we see this year's average OPEC basket price actually topping 2006's, at US$62.5 per barrel (bbl), compared with US$60.9/bbl last year, the outlook thereafter is for a lower price environment. Since most of this non-oil activity is generated in Dubai, we take a closer look, this quarter, at the emirate where nothing stands still for long.

The Commercial Banking Sector The UAE's banking sector is currently experiencing a period of solid growth, like the country's economy in general. Total banking assets reached US$34.2bn by the end of 2006, with a growth rate of 34.7% - which is very high by both regional and international standards. In fact, this is the 8th highest rate of growth among the 59 countries surveyed.

BMI is forecasting assets, deposits and loan growth at an average of 25% per annum throughout the forecast period (to 2011). At this rate, total assets will reach over US$714.8 in 2011.

To the end of 2006, loans grew by 35% and deposits by 23% - yielding a loans/deposits ratio of 124.8% (which is continuing to grow). The loans/assets ratio, on the other hand, is a relatively conservative 54.8%.

Press Releases The Islamic and private banking sector reported large increases in profits to the first quarter of 2007.

However, other profit reports are conflicting. While the National Bank of Abu Dhabi (NBAD), the largest lender in the UAE, posted its fourth consecutive decline in quarterly profit, the Commercial Bank of Dubai (CBD) recently reported an increase of 11% in its first quarter profit to AED218mn compared with AED197mn in the same period of 2006. Domestic rivals National Bank of Dubai and Emirates Bank International recently hired Goldman Sachs to advise on merging to create the Gulf's biggest lender by assets, and compete more effectively against regional and international banks.

Despite losses, NBAD is planning to open as many as 20 branches in the UAE this year. Banks are also opening employment opportunities to graduates and UAE nationals. This coincides with reports of results of a country-wide survey suggesting that banks in the UAE are not doing enough to help young entrepreneurs set up new businesses.