A remedy but no immediate cure
The Abu Dhabi Government's recent Dh16 billion capital injection into the emirate's biggest banks is to be applauded as it further strengthens the balance sheets of the banks concerned, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, First Gulf Bank, Union National Bank and Abu Dhabi Islamic Bank. Not only does it shore up the capital buffer of these institutions but also underlies the government's inherent support for the banks.
However, the support will not provide any immediate cure to the problems and challenges facing the banks and the banking system. The additional capital injection certainly gives the institutions more financial backing to absorb higher loan defaults now and going forward. On this note, the trend of rising non-performing loans for the local market, the UAE and indeed the wider GCC sector will accelerate as 2009 progresses. On a year-on-year basis, classified loans are expected to rise by more than 35 per cent. There will be market variances. Ironically, Abu Dhabi-based banks are expected to register a comparatively lower increase. In contrast, banks in Dubai and Kuwait, for example, will see more pressure on loan books.
The capital injection will also give the backing to support loan growth, at least technically. However, banks will remain extremely cautious and any renewed increase on loans financing activity is very unlikely. Bank management will remain cautious in taking on new credit exposures as the downturn in economic activity is still playing out and the operating environment will get more challenging before any stability or improvement is seen.
The move by the emirate mirrors governments around the globe to strengthen banks' balance sheets and in an attempt to stimulate loan growth. However, with regard to the latter, none have so far been successful with banks' still refraining from new lending. This reflects, justifiably, still negative concerns about prospects for the real sector and the fact of the belief the financial crisis has not bottomed out as yet. Part of the rationale behind the government's move is to try and maintain Abu Dhabi's impetus in its infrastructure development.
Liquidity, both in the UAE and throughout the GCC, remains tight despite various government schemes. International banks are still withdrawing and reducing financing, bank deposits and credit lines to the region. There is unlikely to be a return of any noticeable funding to the region for the remainder of 2009.
Many governments in the region have pumped liquidity into the system in order to try and reignite lending. Deposit guarantees have been put in place and interest rates have been lowered. The UAE has provided significant funding programmes, as have Qatar, Saudi Arabia and Kuwait. However, so far there has not been any meaningful change. Kuwaiti authorities have been quite active in supporting the financing and banking sector and in injecting liquidity. However, credit and financing in the Kuwait markets remains very tight and both corporates and investment houses are still struggling with financing pressure.
Banks in the Gulf still face a very difficult year. Results to date for full year 2008 have so far been mixed. A few have already released sharply lower net profit figures due to higher provisions and write-downs in investments on the books. Most central banks in the region have instructed bank management to be very prudent in providing provisions for loans, managed funds and other investment asset exposures. Many of the provisions to date have been general in nature. However, as the year progresses, there will be a large base of problematic loans and possibly further investment assets problems that will require specific provisioning. Thus the general provision base will probably be fully utilised, and quickly so.
Large banks in a number of countries across the globe have received huge liquidity injections and their core capital positions are now adequate. Despite this, and other monetary and liquidity measures, lending has not returned. Capital-wise, most Gulf banks have resources to support current balance sheets and the expected rise in bad loans. However, liquidity for the banking system will remain tight and there will certainly not be any sudden financing activity to boost economic growth.
- The author is a US-based commentator on business issues
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