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Mon 5 Jan 2009 08:56 AM

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UAE banks at high exposure to real estate sector

UAE's banks are most vulnerable to loan defaults in the region, analysts have warned.

The UAE's banks have the highest exposure to the real estate sector among its regional peers, casting doubts on the asset quality of many, according to analysts.

Banks in the UAE and Kuwait have the highest exposure to the real estate sector, standing at about 35 percent and 31 percent respectively, according to statistics for the first half of 2008 revealed in a recent report by Credit Suisse.

However, Saudi Arabia's banking sector has the least real estate exposure standing at just 7.5 per cent of total loans, reported UAE daily Gulf News on Monday.

"It is likely that a significant part of corporate and personal loans have been invested in real estate. We believe that the true exposure for UAE may lie around 35 per cent of total loans," said Mohammad Hawa and Digvijay Singh, research analysts with Credit Suisse.

The high loans-to-deposit ratio, combined with high exposure to real estate, makes UAE banks more vulnerable to loan defaults, banking experts are warning.

International rating agencies such as Moody's and Standard & Poor (S&P) have said a sharp sector correction will have a big impact on banks as many have significant exposure to the sector.

"Plunging oil prices, an economic slowdown, the falling stock market and pressure on real estate prices are raising major hurdles for the banks, said S&P's credit analysts Emanuel Volland.

Looking forward, these factors are expected to lead to a major slowdown in business growth and deterioration in asset quality and profitability," he added.

According to the Credit Suisse report, the UAE banks have the highest funding gap in the region, with their average loan-to-deposit ratio being 122.8 per cent against the central bank ceiling of 100 per cent.

Among the UAE banks, Abu Dhabi Commercial Bank has the highest loan-to deposit ratio of 147.2 per cent, followed by Emirates NBD at 121.8 per cent.

Although Gulf banks in general are well capitalised with low leverage ratios (total assets to total shareholders' equity) compared to US and European banks, analysts expect that shortage of long term funding sources will compel them to shrink (deleverage) their asset size.

"GCC banks need to undergo a period of de-leveraging. We think that access to wholesale funding has become difficult and costly. We therefore expect GCC banks to deleverage their balance sheets," the Credit Suisse report said.

Over the past two months, most banks in the UAE have become cautious in lending. As the deleveraging process continues, the margins are likely to take a hit.

This is due to the constraint on credit growth and the rising marginal cost of funding. In the UAE, banks are currently offering up to seven per cent on time deposits against less than two per cent a few months ago bringing down margins on retail loans substantially.

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Martin 10 years ago

'Major slowdown' is the phrase that stands out in this solid article. Are we finally taking our sunglasses off and aligning reporting with the economic realities on the ground? We need more and complete facts, rather then hollow testimonies of wishful thinking.

Swamy Reddy 10 years ago

What could be the better or best balternative investment to the UAE banks other then reality (prime) sector. East or West all countries experianced big disasters in 2008. Recession all around who's to blame this is vicious circle.