UAE banks' bad loan provisions decline

Small drop in October is first since global financial crisis hit region in 2008 - official data
By Reuters
Thu 27 Dec 2012 10:24 AM

Outstanding provisions for bad loans set aside by banks in the UAE fell in October for the first time since the global financial crisis began building in 2008, central bank data has showed.

The small drop does not indicate an end to the corporate debt problems that have weighed on UAE banks' earnings over the past several years. But it does suggest the banks are over the worst of those problems, helped by solid economic growth and a fledgling recovery of Dubai's real estate market.

Provisions set aside for specific non-performing loans edged down to AED65.3bn ($17.8bn) at the end of October from AED65.4bn in September, the data showed.

The official WAM news agency said it was the first time since 2008 that provisions had dropped. In October 2011 they stood at AED51.9bn and at the end of 2008 they amounted to AED19.7bn, according to the central bank.

General provisions earmarked for other purposes by the 23 UAE-based banks and 28 units of foreign banks also fell slightly in October to AED17.4bn from AED17.6bn in September; they totalled AED15.4bn in October 2011.

Banks in the UAE were hit first by the global financial crisis, then by the Dubai corporate debt disaster of 2009-2010, when the emirate's real estate market crashed and conglomerate Dubai World asked to restructure $25bn of debt.

The debt problems have not yet been fully worked through. For example another investment conglomerate, Dubai Group, is still struggling to restructure $10 billion of debt, and it is not clear whether banks may have to take further provisions against that debt.

Early this month, credit rating agency Moody's Investors Service downgraded ratings of three Dubai banks including the emirate's biggest, Emirates NBD. It cited large amounts of problem loans and said the banks had low levels of balance sheet coverage for loan losses and would need additional provisioning.

But a recovery in Dubai's real estate market has greatly improved the bond market's confidence in the financial strength of UAE banks and many of their big customers, and their bond yields have plunged this year.

Moody's predicted last month that the ratio of problem loans to gross loans in the UAE banking sector would be between 10 and 12 percent for 2012 and drop marginally in 2013.

Banks in the UAE have built up strong capital buffers against losses; they had core capital worth 17.2 percent of risk-weighted assets in September, a much higher level than banks in many Western countries, central bank data showed.

However, the aftermath of the debt crisis has slowed growth in their lending, which rose just 2.8 percent from a year earlier to AED1.10trn in October.

Total deposits, boosted by the real estate recovery and Dubai's ability to attract foreign funds as a safe haven in an unstable region, jumped 9.4 percent to AED1.16trn.

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