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Big test will be the interim 2009 results of Gulf banks

By Darren Stubing

Much focus is currently on the issue of banks' asset quality of loan portfolios as year-end 2008 results slowly get released for Gulf banks. The UAE's central bank is checking more thoroughly local banks' larger loan exposures, taking a more prudent and pro-active approach. However, the review, although a necessary move, will certainly not identify all problem or deteriorating loans in banks' books. More key will be banks' first and second quarter results as loans already booked will have aged further and loans under stress will be more likely to full under non-performing loan classification regulations. In most cases, this falls under the three month non-payment principle unless there are obvious signs that the loan needs to be classified. The real impact of the global credit and economic crisis on the Gulf region was not really severe until the last quarter of 2008.

The time impact is unlikely to see a substantial rise in bad loans for most banks' 2008 results. This is not to say that many banks will not see rises in classified loans and hence higher provisioning charges. There will undoubtedly be increases. However, they may not be as severe as those to be reported going forward in 2009.

The downturn in the region's economy has gathered pace over the last few months and the first half of 2009 looks particularly tough. The lagged effect on companies' cash flow and earnings will likely see more businesses, and individuals, struggle to fulfil bank loan obligations going forward. Reported non-performing loans are thus likely to rise further as 2009 progresses.

The impact of the global downturn in economic growth, the weaker oil price, and the squeeze in credit on Gulf markets has certainly not reached its peak yet. The downturn in the construction and property sectors has been significant but it will get worse before any signs of stability are seen. As with other global markets, bank credit has largely been cut off, which places cash flow and liquidity pressure on Gulf corporates and businesses. This ends up being a vicious circle with companies unable to service their bank loan obligations. By market, the biggest increases in banks' non-performing loans are likely to be the UAE, and specifically Dubai focused institutions, and Kuwait. The real estate downturn in Dubai is biting hard both directly to the construction sector but also in connected sectors.

Further into 2009 the operating environment for Gulf banks looks set to be very challenging. As well as higher levels of bad loans, credit and balance sheet growth will be weak, and funding costs will be higher. This will hit returns. Being vigilant in regard to end 2008 accounts is important. However, this may not reflect the extent of challenges and loan problems going forward in 2009. This situation will exacerbate further if the regional economies get worse, which may happen. We may not see the true impact until end 2009 bank accounts are released.