By Arif Sharif
UAE banks being hurt as crisis weakens lending and investment banking activity.
Dubai World’s $23.5bn debt restructuring will hurt second-quarter earnings at three of the six biggest banks in the UAE, analysts said.
Earnings at Emirates NBD, the UAE’s biggest lender by assets, will likely decline 45 percent to AED468m ($127m), according to the median estimate of three analysts surveyed by Bloomberg News. Profit at third-ranked Abu Dhabi Commercial Bank will drop 40 percent to AED182m and by 63 percent to AED166m at top Islamic lender Dubai Islamic Bank, the survey showed.
Provisions for bad loans will remain high and banks will set aside money to cover part of the loan losses from Dubai World in the second quarter, said Murad Ansari, a Riyadh-based analyst at EFG-Hermes Holding. Revenue growth also slowed as lending “has yet to show any sign of recovery,” he said.
UAE banks are being hurt as the global credit crisis weakened lending and investment banking activity, while provisions for bad loans are rising amid the economic slowdown. Dubai World, one of the emirate’s three main state-owned holding companies, is seeking to alter the terms on $23.5bn of liabilities, including $14.4bn of bank debt. Emirates NBD and Abu Dhabi Commercial are its biggest lenders.
UAE economic growth may accelerate to 3.2 percent in 2010 with oil prices at $85 a barrel from 1.3 percent in 2009, Economy Minister Sultan Bin Saeed al-Mansouri said in May.
“Banks that have taken a conservative stance on loan growth and asset quality, such as NBAD and UNB, are likely to stay away from significant drops in earnings,” said Janany Vamadeva, an analyst at HC Brokerage in Dubai. “Ruling out events such as Dubai World in the region and unfavorable global events, we can expect some pick up in lending in the fourth quarter.”
Profit at National Bank of Abu Dhabi, the UAE’s second-biggest lender, advanced 3.4 percent to AED937m, the survey showed. Earnings at First Gulf Bank, owned by Abu Dhabi’s ruling family, likely climbed 7 percent to AED829m and 32 percent to AED359m at Union National Bank, another state-owned lender.
The average ratio of bad or non-performing loans to gross loans for the nine largest UAE banks rose to 4.3 percent at the end of 2009 from 1.7 percent in the previous year, according to a Fitch Ratings report in June. Even then, these ratios aren’t a true reflection of the extent of bad debt as several loans have been rescheduled, Fitch said. The ratio reported by the Middle East unit of HSBC Holdings of 7.3 percent is a better indication given its more stringent rules, Fitch said.
Lending in the UAE has risen a mere 0.3 percent in the first five months of this year on top of a 2.4 percent increase in 2009 after growing by more than 30 percent annually from 2005 to 2008. A shortage of money at banks has led to a 25 percent increase in inter-bank borrowing costs this year to 2.35 percent, central bank data show.
Two UAE banks have already reported earnings. Abu Dhabi Islamic Bank, the UAE’s second-biggest bank complying with Islamic banking rules, reported Sunday a 56 percent rise in second-quarter profit to AED301.6m. Commercial Bank of Dubai on July 14 reported a 4.6 percent fall in second-quarter profit to AED255.3m as provisions for bad loans rose. (Bloomberg)
Restructuring of loans means entities can't keep up with their payments, which in turn may lead to default of loan contract. It's more or less like a post-dated check that has or will eminently be bounced. So who's going to jail?