Bank credit to govt rises sharply

UAE bank credit to the government surged by nearly Dhfour billion in August while personal loans recorded similar growth as banks appear to be easing lending to some sectors, according to the Central Bank.

From around Dh92.6 billion at the end of July, credit provided by the country’s 23 national banks and 28 foreign units to the UAE government increased to nearly Dh96.58 billion at the end of August, it said in its latest monthly bulletin.

Personal loans rose from about Dh180.8 billion to nearly Dh184.5 billion in the same period, bringing the total credit extended by banks to individuals to nearly Dh13 billion in the first eight months of this year.

The personal loans this year surpassed those extended through 2009 of around Dh11 billion and showed banks have become less tight towards individuals given their relatively small loans compared to those provided to companies.

The figures also showed the banks have remained selective in their credit as they favour the less risky public sector.

“Lending to the private sector has remained stagnant as banks are still reluctant to engage in large loans to this sector while demand for credit by the companies themselves is still weak,” an Abu Dhabi-based banker said.

The figures showed lending to the private sector slipped to around Dh598.4 billion at the end of August from Dh590.8 billion at the end of July.

As for the first eight months, domestic credit has remained at one of its weakest levels, with total resident loans falling to around Dh778.7 billion at the end of August from nearly Dh788.8 billion at the end of 2009.

Lending declined despite a surge in deposits to around Dh1,004 billion at the end of August from nearly Dh982.6 billion at the end of 2009.

A large part of the increase in deposits was in those by non-residents as they soared to about Dh105.5 billion from Dh88.5 billion.

A breakdown showed private business and industrial establishments were worst hit by the credit slowdown, with lending to them tumbling to nearly Dh328 billion at the end of August from Dh355.2 billion at the end of 2009.

In contrast, credit to financial institutions soared to around Dh61.7 billion from Dh51.1 billion  while other credit remained almost unchanged at Dh198 billion.

Like in other Gulf oil producers, UAE banks have been hit by the 2008 global financial distress and ensuing regional default problems, prompting them to tighten their credit lines and work on improving their worsening asset quality.

The slackening credit activity at home has prompted region banks to look for other sources of income, including foreign markets.

The report showed UAE banks boosted their foreign assets by nearly Dh20 billion to Dh228.8 billion at the end of August from Dh208.1 billion at the end of 2009. The bulk of the increase was in their deposits with foreign banks as they surged to around Dh71.3 billion from Dh55.5 billion in the same period.

Heavy exposure by the banks to regional defaulting firms has triggered a massive provisioning drive, with their loan loss provisions soaring to a record high of Dh37.8 billion in September from Dh19.7 billion at the end of 2008.

High provisions allied with a steep fall in credit to adversely affect the banks’ performance, with the net earnings of national banks dipping by about 1.14 per cent in the first quarter of 2010 and more than 20 per cent in 2009.

But first half earnings by many local banks were better, as the combined income of 12 listed banks grew by around 2.2 per cent to Dh8.238 billion from nearly Dh8.053 billion in the first half of 2009.

Analysts believe the banks need to take more NPL provisions as they appear to be heavily exposed to the real estate and construction sector because of a sharp downturn in the aftermath of the 2008 global fiscal crisis.

According to a key Western financial institution, UIAE banks have emerged as more vulnerable to real estate downturns than those in other Gulf oil producers because of their massive lending for that sector.

The Washington-based Institute of International Finance (IIF) said overexposure to real estate and Saudi businesses has eroded the Gulf banks’ asset quality.

“In the UAE, the banking system is significantly exposed to the construction sector and the highly speculative real estate sector. Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and government-related entities in Dubai.”

Its figures showed the NPL ratio of UAE banks rose from 2.5 per cent at the end of 2008 to 4.3 per cent at the end of2009, and is expected to grow to about nine per cent at the end of this year. The report said the increase is partly due to the central bank’s tightening of regulatory standards via a reduction of the loan classification period from 180 days to 90 days.

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