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29 March 2024

UAE accounts for half of Gulf banks’ Q2 provisions

ADCB, one of the most exposed banks to Dubai World and related entities, has already taken the hit in Q2 2010. (FILE)

Published
By Waheed Abbas

Provisions by the UAE banks accounted for half of those taken by the Gulf banks in the second quarter this year, followed by Saudi Arabia which contributed 23 per cent. But they are expected to increase further in coming quarters which will results in UAE banks witnessing decline in profitability, said a study released on Sunday.

According to Global Investment House statistics, almost all UAE banks witnessed a high growth in provisions, led by Emirates NBD and Abu Dhabi Commercial Bank which were most affected by exposure to Dubai World and related entities. The case in KSA was different with a majority of banks portraying an ease-off in provisions except for SIBC, SABB and RIBL.

It said provision, which emenated mostly from loan defaults, led to a massive 48 per cent rise quarter-on-quarter (QoQ) in the region. The Gulf banks’ provision reached $1.9 billion at the end of Q2 2010 against $1.8bn in Q2 2009.

Global warned that the Gulf banking sector is expected to show an increase in provision in the coming quarters, related mostly to those trickling in from UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to exposure to Dubai World and related entities. Albeit ADCB, one of the most exposed banks to Dubai World and related entities has already taken the hit in Q2 2010, other banks are still to follow suit. Moreover, additional provisions are expected due to changes in the Central Bank’s regulations.

The rise in aggregate provisions took a toll on aggregate earnings, eroding as much as 25 per cent of the total GCC banking profit. The effect was more profound in UAE banking aggregate where 41 per cent of the total income was lost to provisions; the second highest in at least the last 15 quarters. Among all countries only Oman’s provisions seem to have returned to normalised pre-crisis levels while that of the remaining countries are still considerably high.

“While profitability of UAE banks in H2 2010 is expected to be lower than the first half, we may see that of other countries to fare better, with easing off provisioning requirements,” Global analysts said in the report.

Total earnings growth of the GCC banking sector came under considerable pressure owing to continuation of high provisions during Q2 2010. While the top-line barely moved year-on-year, provisions grew by five per cent year-on-year (YoY).

The aggregate net interest income of Gulf Co-operation Council (GCC) banks grew by a meager one per cent YoY, spelling out stagnancy in the topline. Loans growth remain diminished, growing 3.5 per cent YoY in Q2 2010 and 0.7 per cent year-to-date.

Gauging a pick-up in macro-economic activity across the GCC and certain country specific risks, Global maintained its positive stance on Qatar and neutral on the banking sectors of the remaining GCC countries. That said, GCC banking sector is expected to show an increase in provision in the coming quarters, related mostly to those trickling in from the UAE. Banks in the UAE are anticipated to tighten their belts in the wake of expected issuance of guidelines from the Central Bank related to provisioning for exposure to Dubai World and related entities.

Aggregate profit of the GCC banking sector posted a decline of five per cent YoY and 10 per cent QoQ in Q2 2010. Poor bottom-line performance was exhibited by UAE banks that declined by 30 per cent YoY with a further dampening act coming from Saudi banks which were down by 7 per cent YoY.

Being heavyweights in GCC banking universe profitability at Q2 10 profit share of 19 per cent and 46 per cent respectively, banks indigenous to these two countries led the slide in overall profitability of the GCC aggregate, while those from the remaining countries fared much better. Banking sectors of Oman and Kuwait earned the spot-light with growth of 40 per cent YoY and 34 per cent YoY respectively.