Bad loans still haunting UAE banks

Specific provisions made by UAE banks for non-performing loans (NPLs) rose to their highest ever level at Dh50.4 billion in September – a 33.33 per cent increase year-on-year even as bank deposits are down 5.4 per cent in the past six months, data released today by UAE Central Bank shows.

As businesses both large and small continue to restructure their debt, and individuals remain cautious in taking risks, UAE banks’ provisions for NPLs rose 2.4 per cent month-on-month to Dh50.4 billion in September 2011, up by a third over the Dh37.8bn recorded in September 2010, and 13.8 per cent higher in the first nine months of the year, according to official data.

The country’s real estate sector, to which the banking sector has a huge exposure, has continued to see prices decline this year although at a lower clip than in the previous couple of years. As most mortgages taken out during 2007 and 2008 remain under water, analysts believe that it won’t be until at least the second half of next year that retail demand will return in the residential sector, which remains bogged down on fears of a supply glut.

Total provisions in the region’s second largest economy increased to Dh65.9bn at the end of September, up almost 27 per cent from Dh52bn recorded a year ago, and are more than 6 per cent of total lending – the highest loans-to-NPLs level recorded by the UAE’s banking sector.

Despite witnessing a healthy increase of 1.7 per cent month-on-month and up 4.3 per cent in the first nine months of 2011, cautiousness and low demand from the private sector has resulted in UAE bank lending rising just Dh36.7bn, or 3.5 per cent in the 12-month period (until end of September) to Dh1.075 trillion, data shows.

Moreover, bank deposits, which shot up to a high of Dh1.128 trillion in April this year are now down Dh61bn, or 5.4 per cent, from that level. Overall, however, deposits are up 1.7 per cent in the first nine months of 2011, and Dh54bn, or 5.3 per cent, growth in 12 months.

Bank assets have continued their growth and are now at Dh1.67 trillion, up Dh88bn, or 5.5 per cent year-on-year in September, and 4.1 per cent in the first nine months of the year.

Analysts believe lending outlook for the country’s banks is set to improve next year with banks having taken reasonable provisioning for the non-performing loans, in line with Central Bank requirements. The increased level of year-on-year and month-on-month provisioning further shows that the country’s banks continue to take balance-sheet measures against bad loans.