Gulf banks would be relatively resilient to a moderate rise in non-performing loans (NPLs) and set aside more provisions, said a senior analyst from Moody's Interbank Credit Service.
However, the analyst said it was "disappointing" to see that the banks in the region were not making provisions proactively "as we expect the credit cycle to become worse".
"Level of NPLs in the GCC has been very low. Even if they have to take an NPL hit in one year, they do have sufficient profitability and capital. So they would still remain well capitalised and able to absorb losses," Mardig Haladjian, General Manager, Financial Institutions Group, Moody's Interbank Credit Service, told Emirates Business.
In case of the UAE, the NPL level has been fairly low, "below 3.5 per cent for the banks we rate", he said adding, "a lot depends on bank to bank basis, the exposure that they have. We are concerned about banks that have high exposure to property."
The exposure of the banking sector to property "may not be alarming but it is substantial." Haladjian said a further deterioration in the property segment could affect results of banks as there would be repayment problems.
As the rating agency is not buoyant on the property market, the analyst said it expected hard times ahead.
"Already banks are renegotiating restructuring loans with borrowers. If confidence does not return quickly, over a year to 18 months and the market continues to be depressed then the banks will have to recognise that some loans have to be worked on emergency basis."
"That's why I think as long as they can make profits now, they do see down the line things may not be good; they should be setting aside provisions in order to have some reserves take care of possible losses."
He said "accounting wise" what the banks were doing in terms of provisions was fine, but based on expectations about the global economic scenario, some preparation was required in terms of financial position. "We believe they should be setting aside more provisions."
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