UAE banks 'well capitalised to deal with defaults'

UAE banks can manage their exposure to defaulting debtors as they have built up a large capital and a solid provision base against non-performing loans (NPLs), according to the Institute of International Finance (IIF).

The Washington-based institute, which groups major banks in the industrial countries, was commenting on the impact of the Dubai World debt restructuring on domestic banks in its latest report on the UAE economy.

The report, part of which was obtained by Emirates Business yesterday, said the UAE's real GDP slipped by around 1.6 per cent in 2009 but is expected to rebound by two per cent in 2010. In case of accelerated reforms in Dubai, GDP growth could increase to 2.7 per cent in 2010 and surge to 4.3 per cent in 2011.

"The impact of DW's debt restructuring on domestic banks is likely to remain manageable. UAE banks are well capitalised with average capital adequacy ratio of 20.3 per cent at end-March 2010, up from 13 per cent at end-2008... the capital adequacy ratio of the UAE is now one of the highest among emerging economies," said Garbis Iradian, senior economist at IIF.

"Nonetheless, the restructuring of DW's debt will have a moderate impact on domestic liquidity and economic activity. Some banks with significant exposure would need to strengthen capital buffers."

The report expected the combined NPLs by the country's 24 national banks and 28 foreign units to soar from around 4.3 per cent in 2009 to nearly nine per cent of total loans in 2010.

It said the increase in the NPL-loans ratio 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. Central Bank figures showed the UAE banks controlled the largest capital base in the Arab world, with their shareholders equity peaking at Dh252.8 billion at the end of March.

The level is nearly Dh64bn above their capital a year ago as most banks are pushing ahead with a drive to expand their capital in line with Central Bank instructions to bolster their financial position.

Banks stepped up that drive following new rules by the Central Bank to set a minimum adequacy ratio of 11 per cent last year and 12 per cent this year.

The increase in capital was backed by a surge in NPL provisions, which hit an all time high of around Dh34.4bn at the end of March. According to the IIF, the UAE's real GDP dipped by around 1.6 per cent mainly because of a 10 per cent cut in its oil output in line with an Opec agreement to trim crude supplies to keep prices firm.

The report expected GDP to rebound by around two per cent this year driven by high spending in Abu Dhabi.

"Dubai's economy could shrink by 0.7 per cent… the continued retrenchment in construction and real estate sectors [which accounted for 24 per cent of GDP in 2008] will more than offset the modest recovery in the emirate's core activities of trade, retail sales, and tourism," IIF said. "The IIF's accelerated reform scenario assumes the following: a significant strengthening of the federation, operational restructuring of GREs [government-related entities] improving their long term viability and clarification of the role of the sovereign vis-à-vis GRE's and major improvements in disclosure and transparency on the balance sheets of corporate entities.

"Under this scenario, real GDP growth for the UAE is estimated at 2.7 per cent in 2010 and 4.3 per cent in 2011... Dubai could register a growth rate of around one per cent in 2010 and three per cent in 2011."

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