Improved loan default rate to boost UAE banks in 2011: expert

After growing at a near damning rate of over 65 per cent in 2009, growth in UAE banks' provisioning for non-performing loans (NPLs) has slowed down to a little under 16 per cent in the first nine months of 2010, official Central Bank data shows.

This, say experts, is a positive sign indicating that the worst may be behind the country's banks and that after another quarter or so of provisioning, they will likely see a return to normality.

"I feel by the end of 2010, provisioning would hit their peaks," M.R. Raghu, Senior Vice-President, Research at Kuwait Financial Centre (Markaz), told Emirates 24|7.

"The first two quarters of this year marked significant increase and it is expected that the remaining of the year would also witness the same trend after which it should gradually come back to normal levels," he added.

According to UAE Central Bank, the country's banks' specific provisions for NPLs shot up 65.5 per cent to Dh32.6b at the end of 2009 from Dh19.7b at the end of the previous year thanks to the global fiscal distress. However, data shows that the first nine months have seen an increase in bad loan provisioning of just 16 per cent to Dh37.8b at the end of September 2010.

Analysts maintain that worst is over for banks in the country, and next year will likely spell good growth.

"With the worst behind them in 2010, banks could step into 2011 with better interest margin, lower provisions and even reversal of earlier provisions," said Raghu.

"I feel banks will return to moderate credit growth in 2011 though they will trim their exposure to sensitive sectors like construction, real estate and personal loans," he added.

That may already be happening. Data shows that the country's banks have extended additional loans and advances (net of provisions) worth Dh20.7b since the beginning of 2010 until September. However, of that, additional personal loans account for Dh5.1b, or below 25 per cent, with the remaining 75 per cent of additional loans extended to government and corporate entities.

Raghu also added that the sector may not see any consolidation in the near future." "I don't see a trend in consolidation for UAE banks. Consolidation happened in the past during good times as well. Hence, it cannot be predicted," he said.

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