UAE banks push ahead with provisioning drive

UAE banks chopped nearly Dh1.7 billion off their resources in June as they pushed ahead with a post-crisis drive to build up loan loss provisions and improve their damaged asset quality, official data showed on Thursday.

Provisions allocated by the country’s 51 banks for non-performing loans (NPL) climbed to a record high of Dh36.9 billion at the end of June from Dh35.2bn at the end of May, the Central Bank said in its latest monthly indicators.

The 23 national banks and 28 foreign units had been expected to ease the provisioning drive this year, but the figures showed there was no slowdown, with NPL allocations totalling about Dh4.3bn in the first half of 2010.

Analysts said banks need to take more provisions as they might be heavily exposed to the real estate and construction sector because of a sharp downturn in the aftermath of the 2008 global fiscal crisis.

UAE banks allocated a record high of Dh12.9bn for NPL provisions through 2009 because of their exposure to financially troubled companies in the region, mainly the Saad and Algosaibi family businesses of Saudi Arabia.

“I believe UAE banks are heavily exposed to the local real estate sector following the sharp increase in their loans to this sector due to a rapid growth in this activity in the few years before the crisis,” said Ziad Dabbas, financial advisor at the government-controlled National Bank of Abu Dhabi.

“I expect 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 income.”

According to a key Western financial institution, UAE banks have emerged as more vulnerable to real estate downturns than those in other Gulf oil producers because of their massive lending to that sector.

The Washington-based Institute of International Finance (IIF) said overexposure to real estate and Saudi businesses has eroded the Gulf banks’ asset quality.

“In the UAE, the banking system is significantly exposed to the construction sector and the highly speculative real estate sector. Several banks in the UAE are exposed to high levels of credit risk in connection with the family-affiliated conglomerates in Saudi Arabia and government-related entities in Dubai,” it said.

Its figures showed the NPL ratio of UAE banks rose from 2.5 per cent at the end of 2008 to 4.3 per cent at the end of2009, and is expected to grow to about nine per cent at the end of this year. The report said the increase 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.

The Central Bank report showed bank credit picked up in June after a sharp slowdown in the previous two months, rising by about Dh4bn to Dh1,025bn at the end of the month. But credit growth remained as low as 0.7 per cent in the first half of 2010 to extend a lull lending period through 2009.

The figures showed deposits jumped by nearly Dh15bn to Dh985.4bn at the end of June from Dh970bn at the end of May.

The banks’ combined shareholders equity remained unchanged at about Dh255.1bn at the end of June, but their capital adequacy climbed to an all-time high of 20.4 per cent, the report showed.

Their consolidated assets gained nearly Dh4bn to reach Dh1,538.8bn at the end of June and maintain the UAE’s position as having the largest banking sector in the Arab world.

Follow Emirates 24|7 on Google News.