Dubai banks' bad loan provisions to peak by 2013

Debt restructurings, property market woes may push provisions to a record: analysts
Dubai banks' bad loan provisions to peak by 2013
Dubai still has a number of state-linked debt restructurings to complete
By Bloomberg
Mon 05 Dec 2011 07:55 AM

Dubai banks’ provisions to cover bad loans may surge to a record in the next two years as debt restructurings continue and a slowing global economy prevents a recovery of the emirate’s property market.

Non-performing loans will peak at 15 percent to 16 percent in 2013, up from 4.8 percent in 2009 and 11.3 percent in 2010, investment bank Exotix said Dec 4.

Moody’s Investors Service expects provisions to peak at 13 percent to 16 percent next year, it said in a report Nov 3. Rasmala Investment Bank said yesterday it expects bad loans to reach a high in 2012.

“There are still a lot of Dubai government-related debt restructurings that need to work their way through the banking system,” said Gus Chehayeb, a Dubai-based associate director at Exotix. “Also, given the 50 to 60 percent decline in property prices in Dubai, NPLs should be a lot higher so you would expect them to rise over the next two years.” That increase will “keep a cap on bank lending and profit growth in the near term,” he said.

State-controlled companies including Dubai Holding and Drydocks World are still in talks with lenders to restructure debt, while Dubai World reached an agreement with creditors on about $25bn of debt in March. The default risk of Dubai, which isn’t rated, was at 429 basis points on Dec. 2, according to data provider CMA. That’s more than three times higher than Abu Dhabi’s, which was at 122 basis points.

Provisions for non-performing loans in the United Arab Emirates rose 14 percent in the first nine months of 2011 to AED50.4bn ($13.7bn), the highest since at least April 2010, when Bloomberg began tracking the country’s banking data. Dubai is the UAE’s business hub, while Abu Dhabi is the capital and home to about 7 percent of the world’s proven oil reserves.

Emirates NBD, the country’s biggest bank and one of the largest creditors to Dubai World, expects its impaired loan ratio to peak at 15 to 16 percent in 2013 from 12.9 percent at the end of the third quarter, the bank’s chief financial officer Surya Subramanian said Oct 24.

The bank posted a 59 percent slump in third-quarter profit and took over unprofitable Dubai Bank on orders from the emirate’s ruler.

“We were originally thinking that 2011 would be the peak year,” said Raj Madha, a banking analyst at Rasmala. “It has gradually become clear that there are still a number of issues, primarily related to the property market, which have not yet worked their way through the system.”

Dubai’s real-estate market went from being one of the world’s best performing to the worst following the global credit crisis, with home prices slumping 64 percent since their mid-2008 peak, Deutsche Bank estimates.

Prices may fall a further 25 percent to 30 percent over the next few years, Rasmala said Oct 27, while a drop of 20 percent was forecast by Arqaam Capital in a report Oct 19.

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Still, banks are taking steps to increase lending to offset bad loans, and some analysts expect provisioning to remain flat over the next few years.

“We expect that 2011 will be the peak in the provisioning cycle for the sector as a whole, but individual banks will continue to provision heavily well into 2013,” said Ankur Shah, an analyst at Arqaam who expects the NPL ratio to remain at 7.94 percent in 2012 from 7.95 percent this year. “In the event we experience a global slowdown, which negatively impacts the UAE economy, our provisioning forecast would rise.”

Creditors of Dubai International Capital, part of ruler Sheikh Mohammed Bin Rashid Al Maktoum’s Dubai Holding group, signed an agreement on the terms to restructure $2.4bn of debt, two bankers involved in the talks said Nov 24.

Nakheel, the builder of man-made islands off Dubai’s coast, received the approval of all its bank creditors in July to restructure about $16.1bn of debt.

Dubai Group, also controlled by Dubai Holding, is restructuring $10bn of liabilities and negotiations may be completed by the end of this year or early next year, Hussain al Qemzi, chief executive officer of Noor Islamic Bank, one of the banks negotiating the deal, said on Oct 10. Monarch Alternative Capital, a New York-based investment company, filed a claim of about $45.5m in a London court against Drydocks World as the Dubai World unit works on restructuring $2.2bn of debt.

“Some loan impairments may have merely been deferred, due to the ongoing government support for government-related issuers,” Khalid Howladar, a senior credit analyst at Moody’s in Dubai said in the Nov. 3 report. “In the longer term, much will depend on the outcome of the restructuring negotiations and refinancing for some large entities, including subsidiaries of Dubai Holding, which have not yet been concluded or are due in 2012.”

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