UAE bank credit dips in first seven months

UAE banks are maintaining a cautious lending policy and pushing ahead with a drive to build up loan loss provisions, with their credit dipping by nearly 1.9 per cent in the first seven months of 2010, according to the Central Bank.

The private sector emerged as the main victim of the slowdown and analysts attributed this to the fact that banks are adopting a stringent lending approach towards non-government establishments and the private sector itself appears to be still with weaker appetite for borrowing.

Figures by the Central Bank showed domestic credit provided by the country’s 23 national banks and 28 foreign units slumped to around Dh773.7 billion at the end of July from nearly Dh788.8 billion at the end of 2009.

Credit to the government edged up slightly to about Dh92.9 billion from Dh91.8 billion but that to the private sector plummeted to around Dh590.8 billion from nearly Dh507 billion in the same period, the figures showed.

Lending generally declined despite a surge in deposits to around Dh998.8 billion at the end of July 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 Dh100.6 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 Dh329 billion at the end of July from Dh355.2 billion at the end of 2009.

In contrast, credit to financial institutions surged to around Dh61.6 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 Dh19 billion to Dh227.2 billion at the end of July 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 Dh72.9 billion from Dh55.5 billion in the same period.

Heavy exposure by the UAE banks to defaulting firms has triggered a massive provisioning drive, with their loan loss provisions soaring above Dh37.2 billion at the end of August 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.

Balance sheets of 16 listed national banks showed their net profits plunged by around 20.6 per cent to Dh14.87 billion in 2009 from Dh18.71 billion in 2008.

Central Bank figures showed UAE banks are pursuing a post-crisis provisioning drive because of their exposure to Dubai World, the domestic real estate sector and two Saudi financially troubled family businesses.

In the first eight months of 2010, the country’s 51 banks chopped nearly Dh4 billion off their coffers for non-performing loans, bringing their total NPL provisions to nearly Dh37.2 billion at the end of August. The level is slightly lower than that of Dh37.3 billion at the end of July.

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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