UAE banks emerged as the strongest financial institutions in Gulf oil producers in terms of capital adequacy but they have the highest ratio of non-performing loans (NPLs) to total credit, according to a Western report.
Following an extensive drive to build up their finances in the wake of the 2008 global fiscal turmoil, banks in the six-nation Gulf Cooperation Council (GCC) now enjoy a strong capital base, with the adequacy ratio exceeding 15 per cent in all member states, said the study by the Washington-based Institute for International Finance (IIF).
“GCC banks remain well capitalized and profitable. The balance sheets of banks in the region have been strengthened as a result of the strong economic performance in recent years and high government participation in banks,” said IIF, which groups scores of major Western banks.
“However, issues of governance and moral hazard remain. In recent years, significant improvement has been made in regulation and supervision.
The report showed capital adequacy in the UAE, which controls the largest Arab banking system by assets, stood at as high as 20.8 per cent at the end of 2011. It stood at 19.5 per cent in Bahrain, 18.5 per cent in Kuwait, 17.1 per cent in Saudi Arabia, 16.1 per cent in Qatar and 15.5 per cent in Oman.
But UAE banks also have the highest NPL to total loans ratio, standing at eight per cent at the end of 2011, the report said.
Qatar’s banks had the lowest ratio of two per cent, reflecting their low exposure, followed by Saudi banks at 2.8 per cent. The ratio stood at 3.3 per cent in Oman, 3.7 per cent in Bahrain and 7.3 per cent in Kuwait.
Kuwait emerged as having the highest loans-to-deposits ratio at around 111 per cent, followed by Oman at 103 per cent and the UAE at 100 per cent.
IIF put the level at 92 per cent in Qatar, 78 per cent in Saudi Arabia and as low as 72 per cent in Bahrain.
“While NPL ratios are in the low single digits, they remain relatively high in Kuwait and the UAE…similarly, the ratios of banks’ provisions to potential losses associated with NPL ratios are high in Saudi Arabia, Oman and Qatar, but below 60 per cent in Kuwait,” IIF said.
It said overexposure to real estate and highly leveraged companies has eroded asset quality in the UAE and Kuwait. In the UAE, exposure to government-related entities (GREs) exceeds 30 peer cent of capital.
In Saudi Arabia, the balance sheets of the banks are in a relatively strong position, as real estate prices remain broadly stable, and banks’ loan-to-deposit ratios are relatively low at 78 per cent as of end-2011.
Prudential regulations in Saudi Arabia, the largest Arab economy, are strictly enforced, the report said, adding that in Kuwait, the banking portfolio is highly exposed to real estate and investment companies, which “have proliferated in recent years without adequate controls.”
IIF noted that private sector credit growth in the UAE and Kuwait has been subdued in the past three years as banks remain cautious in light of the deterioration in asset quality. But it added that credit to non-financial public enterprises (NFPEs), particularly in Abu Dhabi and Qatar, has been increasing at a rapid pace, reflecting what it described as some rebalancing of banks’ portfolios towards safer assets.
“In Dubai, the need to deleverage is the most important factor holding back bank loan growth,” the report said.
“In Saudi Arabia, private sector credit growth has accelerated to 12 per cent in February 2012, year-on-year..……as capital inflows to the region are likely to remain weak in the short term, the funding of credit growth will have to rely on domestic deposit growth.”