UAE has highest Arab bank adequacy

Report warns of slower GDP growth due to high NPLs

The UAE has the highest capital adequacy ratio in its banks in the Arab world because of a steady rise in capital but banks are still maintaining a tight lending police adopted after the 2008 global financial distress.

Despite a massive provisioning drive over the past two years, the UAE’s 51 banks still have one of the lowest provisions-to-NPLs ratio in the region, with Saudi Arabia’s banks retaining the highest ratio, according to the Washington-based Institute for International Finance (IIF).

In a report on the Middle East and North Africa, IIF warned that high non-performing loans (NPLs) for a long period could stifle growth in the region as this discourages banks from resuming normal lending.

A breakdown showed the combined capital adequacy of the UAE banks, which control the largest assets in the Middle East, stood at 20.8 per cent at the end of 2010, far higher than the level in  most other Arab nations.

The ratio was put at 19.6 per cent in Bahrain, 19 per cent in Kuwait, 17.1 per cent in Saudi Arabia, 16.1 per cent in Qatar, 15.5 per cent in Oman, 15.1 per cent in Egypt and 12.6 per cent in Tunisia.
 
The report gave no updated figures for the UAE but a recent report by the Central Bank showed adequacy expanded to 21 per cent at the end of June.

The IIF report showed Saudi Arabia had the highest provisions-to-NPLs ratio of around 116 per cent, followed by Oman at 104 per cent. It stood at 95 per cent in Qatar and 76 per cent in the UAE. The lowest ratio was recorded in Bahrain and Tunisia at nearly 60 per cent, according to the report.

The loans-to-deposits ratio was the highest in Tunisia at 120 per cent, followed by Oman at 103 per cent and the UAE at 98 per cent.

The report showed lending to the private sector has remained weak in the UAE compared to other Gulf countries, with domestic credit in Abu Dhabi growing by less than five per cent in 2009 and 2010. But the report expected lending in the emirate to pick up through 2011 and 2012.

In Dubai, domestic credit recorded negative growth in 2009-2010 but is expected to recover during 2011-2012, the report said.

Qatari banks recorded the highest private sector credit growth of between seven and 11 per cent during 2009-2010 and are projected to top 13 per cent in 2011-2012.

Credit growth in Saudi Arabia dipped to below one per cent in 2009 before it sharply rebounded to over five per cent in 2010, the report said, adding that it expects the rate to pick up to more than nine per cent during 2011-2012.

“The financial crisis of 2008-2009 and the preceding boom that have left a large

share of banks’ loan portfolios impaired.  NPLs are particularly high in Kuwait and the UAE……other financial soundness indicators, however, suggest that banking systems are generally well capitalised and that provisioning levels are satisfactory,” said IIF, which groups over 450 global financial firms.

The report noted that tight liquidity positions that undermined lending activity in the region in the past three years have eased, with weighted average loan-to-deposit ratios reaching about 90 per cent in August 2011, as compared with slightly more than 100 per cent in 2008.

“High levels of NPLs over prolonged periods of time may hold back economic recovery for the following reasons,” it said.
 
“First, impaired debtors have little incentive and ability to step up economic activity, as any incremental income would accrue largely to creditors.  Second, lack of financing hinders investment. Third, banks with a high number of NPLs are less likely to engage in new lending. Fourth, high levels of NPLs can reduce banks’ capacity to finance new loans.”

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