National Bank of Umm Al Quwain appears to have seen the worst effects of COVID-19

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Dubai Financial Market Traders, Dubai Financial Market

Watch out for banking stocks … conservative accounting practices will pay off for them and investors in the medium term.
Photo Credit: Antonin Killian Klush / Gulf News

The Dubai Financial Market rose 1.66 percent and the Abu Dhabi Stock Exchange closed 1.15 percent higher in the week ending March 4.

The top performers are Abu Dhabi Aviation (17.41%), Emirates Driving School (14.88%), Al Dhafra Insurance (14.87%), Ras Al Khaimah National Insurance (13.98%), and Dubai Refreshments Company (13.64%).

Among the banks, National Bank of Umm Al Quwain (NBQ) recently announced its earnings report for 2020. The bank, which derives 84 per cent of its revenue from individual and corporate services, is expected to suffer a setback due to the pandemic.

Nearly 31 percent of the loan book went into the real estate sector, while 69 percent went to wholesale and retail trade, personal loans, manufacturing, transportation, and other financial institutions. Therefore, this is a bank that is closely related to the performance of the economy of the United Arab Emirates.

Despite the challenges, the bank could make a profit of 211 million dirhams on revenue of 417 million dirhams. In 2019, National Bank of Umm Al Quwain reported profits of 424 million dirhams from revenues of 608 million dirhams. Last year profit was affected by a net decrease of 112 million dirhams. However, things could get better due to the way banks conduct their accounts.

Caution with reserves

Bank loan allocations have been inflated because they operate under “Current Expected Credit Losses (CECL), guidelines developed in the wake of the 2008-2009 recession. These laws require banks to provide provisions for potential losses over the entire life of their loan book.”

This conservative accounting stance means that banks are preparing for the loss they expect in the future … even if there is no reason to believe that certain borrowers will default.

The net result is that banks’ reserves of front-loading loans have increased even more than before. They prepare for loan reparations by withholding capital up front. This capital is deducted from profits every three months through a provision and added to the total loss bucket known as the allowance for credit losses.

However, the worst-case scenario may not happen because mass vaccines lead to a rapid recovery in economic activity. Europe vaccinated 4 percent of its population; The United States covered 11 per cent, while the UK leads with 21 per cent vaccination.

Fast strikes tracking

The United Arab Emirates is on track to vaccinate half of its population by March. This should boost activity and reduce potential losses. The macroeconomic scenario is improving. According to the central bank, the non-oil economy is expected to grow by 3.6 percent in 2021, in contrast to a contraction of 4.5 percent in 2020.

We can expect QNB to cancel some provisions in 2021, which will boost profits significantly. Some pre-projected loan losses may not occur at all.

This bodes well for National Bank of Umm Al Quwain as it reduced staff costs for 2020 to 75 million dirhams from 83 million dirhams in the previous year. Several tailwinds in 2021 apply to other UAE bank stocks as well.

But with nearly 69 percent of the business expected to benefit from the reopening of the economy, the National Bank of Umm Al Quwain can deliver good returns for investors. Moreover, the bank also has a yield of approximately 5 percent.

– Vijay Valesha is the Director of Investment at Century Financial.

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