Stronger lending activity has allied with better fees to boost the performance of UAE banks in the second quarter but final results will depend on the extent of their exposure to the troubled Saudi Arabia's Saad and Algosaibi groups, said analysts.

The country's 24 national banks and 28 foreign units are set to reveal the exact degree of their exposure to those conglomerates when they start publishing their quarterly balance sheets within the next few weeks.

"So far, the UAE banks have apparently not taken a decision to set aside provisions against their loans to the Saad and Algosaibi as they are awaiting instructions from the Central Bank in this respect," said Ziad Dabbas, a financial advisor at the government-owned National Bank of Abu Dhabi.

"But I believe most of them have already taken precautionary measures because we are still in the midst of a global crisis and the local real estate sector is declining. There was a strong activity by banks in the second quarter and I think their performance was better than in the first quarter. But if their exposure to those Saudi groups is high, then I expect the net profits to be lower."

Central Bank sources said the bank is in touch with the country's 24 national banks and 28 foreign units to determine the exact proportion of the problem. They said banks would be told about provisions and the need about releasing precise figures about their default loans at a later stage.

UAE banks have already sharply boosted their provisions for non-performing loans because of the global crisis and the slackening real estate sector in the UAE.

The provisions climbed to one of their highest levels of about Dh22.9 billion at the end of May from Dh22.3bn at the end of April and nearly Dh19.7bn at the end of 2008, said the Central Bank.

"I can tell you that the total earnings of the UAE banks will be higher in the second quarter but talking about the net profits, all this depends on the extent of their exposure to the Saad and Algosaibi groups. I believe this will be shown in their balance sheets for the second quarter," said Humam Al Shamma, financial adviser at Abu Dhabi-based Al Fajr Securities.

"Many banks have assured their clients that their exposure is minimal, but let's wait and see their upcoming quarterly results. Generally speaking, their performance in the second quarter is expected to be better because they have stepped up lending activities, especially personal loans, which have high interest rates. The banks also netted high fees on their services, while they have managed to build up deposits, which normally lead to better revenue."

Central Bank figures showed the total deposits with the country's 52 banks peaked at about Dh972.4bn at the end of May, an increase of about Dh50bn since the end of 2008, when they stood at Dh92.5bn.

Loans crossed the Dh1 trillion mark for the first time to hit an all-time high of Dh1.003trn at the end of May. Personal loans also peaked at Dh207.6bn at the end of May, a rise of Dh5bn over the previous month.

"Barring any unexpected developments, I think the performance of the UAE banks in the second quarter will be better than in the first quarter and much better than in the fourth quarter of 2008, this is because lending activity is picking up and most of them have overcome previous problems, mainly in the fourth quarter," said Mohammed Al Asumi, a UAE economist.

"As for any new obligations, especially to those Saudi groups, this will be manifested in their quarterly balance sheets. Their net income will hinge on these obligations; so the banks with high exposure will have lower profits."

After suffering one of their worst financial periods in the fourth quarter of 2008, UAE banks regained ground and boosted their income in the first quarter thanks to the improved liquidity situation and anti-crisis government measures.

Balance sheets of 19 national banks listed on the UAE bourses edged up by 0.07 per cent to Dh5.410bn in the first quarter of 2009 from Dh5.406bn in the first quarter of 2008.

They showed 11 banks made higher profits while earnings of six banks declined and one bank reported losses for the period. Another bank reported profits for the first quarter of 2009 but gave no figures for 2008.

The profits were in sharp contrast with sharp losses or a steep drop in earnings in the last quarter of 2008 because of falling assets prices, losses from investments abroad, higher provisions and other factors.

Despite the modest profit growth in the first quarter of this year, analysts believe it was a good performance that indicated the banks have started to recover.

 

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