UAE banks have started taking tough measures against debtors in line with Central Bank instructions to restore their asset quality that has received a severe blow by the global fiscal crisis and regional default problems.
Bankers quoted in the local Arabic press Sunday said the country’s 51 banks can now take legal measures against defaulting debtors within 90 days instead of six months under new regulations by the Central Bank.
“Starting from the second quarter of this year, all UAE banks will have to take legal measures against defaulting debtors within 90 days instead of 180 days,” said Saif Al Shehi, Local Banking Operations Director at the government-controlled National Bank of Abu Dhabi.
“This is in line with new rules by the Central Bank on non-performing loans (NPLs) requiring them to take provisions of 25 per cent of the loan after 90 days and 50 per cent within 180 days…the loan can then be considered as a bad loan after two years and this requires banks to take provisions of 100 per cent.”
Quoted by the semi-official daily Alittihad, Shehi said measures taken by banks against defaulters including informing the competent authorities, preventing them from leaving the UAE and referring them to court.
Like other Gulf countries, the 23 national banks and 28 foreign units in the UAE have been hit by the global credit squeeze and regional default problems, including those involving the Saudi Saad and Algosaibi family conglomerates.
The problem has already forced UAE banks to largely increase NPL provisions and tighten their credit lines as part of an asset clean-up process.
Central Bank figures showed the combined NPL provisions allocated by UAE banks during 2009 totalled around Dh12.9 billion.
Provisions stood at Dh2.6bn in the first five months of 2010, bringing the total provisions to Dh35.2bn by the end of April, according to the Central Bank.
Besides the crisis and defaults, UAE banks are also believed to be heavily exposed to the real estate and construction sector following the sharp downturn in the sector because of the global credit tightness.
“The UAE banking system is significantly exposed to the construction sector and the highly speculative real estate sector, accounting for nearly 25 per cent of total loans,” the Washington-based Institute of International Finance (IIF) said.
“Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and sizeable government-related entities in Dubai. Exposure to the Saudi conglomerates is unknown, but is presumed to be substantial for a few large banks.”
Citing balance sheets, IIF said the average NPL ratio of UAE banks rose from 2.5 per cent at the end of 2008 to about 4.3 per cent at the end of 2009, and is expected to grow to nearly nine per cent in 2010.
“This rise 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.”
Banks in the other Gulf Co-operation Council (GCC) countries have also been caught in the quagmire of the highly-speculative property sector, with their combined weighted average non-performing loans to total loans nearly doubling from around two per cent at the end of 2008 to four per cent at the end of 2009.
The downturn in the real estate sector has emerged as one of the key factors for the lower profitability of many banks in 2009 along with higher provisioning requirements related to the exposure to the two Saudi family businesses, some deterioration in corporate loan portfolios, and defaults in personal loans.
“UAE banks are heavily exposed to the real estate sector following the sharp increase in their loans to this sector when it was growing very fast during the four to five years before the crisis,” said Ziad Dabbas, financial adviser at NBAD.
“I expect the banks to continue building up NPL provisions this year because the downturn in the real estate and construction sector means a decline in their asset value in that sector…perhaps the provisions this year will be lower than the record allocations in 2009 but I believe they will affect their full year net profits…so, I expect their income to be slightly lower than in 2009.”
High provisions have 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.
From around Dh5.566bn in the first quarter of 2009, the consolidated net profits of the 19 listed banks slumped to Dh5.502bn in the first quarter of 2010, their balance sheets showed.
Analysts considered the results in the first quarter of 2010 as good on the grounds they were far higher than the profits in the fourth quarter of 2009 and slightly lower than their level in the first quarter of 2009, which was better than the Q1 results in 2008 despite the oil boom that year.
Balance sheets of 16 listed national banks also showed their net profits plunged by around 20.6 per cent to Dh14.87bn in 2009 from Dh18.71bn in 2008.