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11 December 2023

UAE private sector credit dips 4% in 10 months

The slackening credit activity at home has prompted region banks to look for other sources of income, including foreign markets. (FILE)

By Nadim Kawach

UAE banks’ credit to the private sector shrank by around four per cent in the first 10 months of 2010 to extend a downward trend since the onset of the 2008 global fiscal distress, official figures have shown.

While loans to the less risky government and other public sector establishments continued to grow slightly, those to he private sector remained dormant as both sides appeared less enthusiastic to engage in lending activity.

The private business and industrial sector was hit hardest by the credit slowdown, plunging by nearly 8.1 per cent in the first 10 months of last year, showed the figures published in the central bank’s monthly statistics bulletin.

From around Dh607 billion at the end of 2009, total credit provided by the UAE’s 23 national banks and 28 foreign units to the private sector receded to nearly Dh582.9 billion at the end of October, a decline of about 4.1 per cent.

But the figures showed private financial institutions, mainly banks, were not affected by the slowdown as credit to them gained nearly Dheight billion to rise from Dh58.1 billion to Dh58.3 billion in the same period.

Credit to private business and industrial establishments slumped from around Dh355.2 billion to Dh326.7 billion, a decline of around 8.1 per cent.

Credit to the private sector had already contracted by about 3.6 per cent through 2009 while loans to private business and industrial institutions grew by nearly 4.1 per cent before it reversed that trend during 2010.

The report showed credit to “others” slipped slightly from around Dh198.9 billion at the end of 2009 to Dh196.2 billion at the end of October.

In contrast, bank credit to the government grew by 10.5 per cent from around Dh91.8 billion at the end of 2009 to Dh101.5 billion at the end of October.

Loans to other public establishments swelled by about 3.6 per cent from Dh89.9 billion to nearly Dh93.2 billion in the same period.

Analysts said the downturn in credit to the private sector was a result of a tight lending policy adopted by banks in the wake of the 2008 crisis and regional debt default problems, which have affected many banks in the UAE and other Gulf oil producers. “The private sector is also not requesting much credit as many companies are shelving expansion plans and other are still wary about the foggy economic and financial conditions worldwide,” an economist said.

The slackening credit activity at home has prompted region banks to look for other sources of income, including foreign markets.

The report showed UAE banks boosted their foreign assets by nearly Dh40 billion to Dh248.3 billion at the end of October from Dh208.1 billion at the end of 2009. The bulk of the increase was in their deposits with foreign banks as they surged to around Dh86.6 billion from Dh55.5 billion in the same period.

Heavy exposure by the UAE banks to defaulting firms has triggered a massive provisioning drive, with their loan loss provisions soaring to nearly Dh41.2 billion at the end of October from Dh19.7 billion at the end of 2008.

High provisions allied with a steep fall in credit to adversely affect the banks’ performance through 2009 and most of 2010.

Balance sheets of 16 listed national banks showed their net profits plunged by around 20.6 per cent to Dh14.87 billion in 2009 from Dh18.71 billion in 2008.

In the first nine months of 2010, the combined net earnings of 17 listed national banks slumped by around 9.6 per cent to around Dh15 billion from around Dh15.5 billion in the same period of 2009.

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

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

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 of 2009, 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.