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Fri 8 Jan 2010 09:18 AM

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UAE banks face gloomy Q4 amid debt woes

Banks' fourth quarter performance to suffer as credit costs and provisions rise.

Banks in the UAE face another gloomy quarter as Dubai's debt problems and an anticipated rise in provisions against bad loans threaten to depress earnings.

"It has been a dramatic final quarter of the year for the UAE, and particularly for the banking sector," said analysts at Egyptian investment bank EFG Hermes.

Dubai said in November it would seek a standstill on billions of dollars of debt related to state-controlled holding Dubai World and two property units.

Analysts are concerned that banks in the emirates, particularly those based in Dubai, will suffer the brunt of the emirate's debt woes and its slumping real estate sector in the form of fresh writedowns.

At the same time, credit costs are likely to rise and the economic slowdown will affect business for the banks. "In addition to the direct impact of any potential debt shortfall, we believe there is likely to be a secondary impact on banks from deterioration in business and consumer confidence," EFG Hermes said.

Some of the UAE's largest banks posted strong top-line growth figures in the previous quarter, but provisions related to financial trouble at two Saudi conglomerates damped profits.

The Saudi companies' trouble, combined with the uncertainty surrounding Dubai World's debt position, is likely to weigh on most Dubai-based banks, as well as Abu Dhabi Commercial Bank (ADCB), analysts said.

"Lending activities are likely to be soft in the fourth quarter as well, notably in the Dubai banks, since Abu Dhabi banks will continue to benefit from government spending and support as seen in the third quarter," said Janany Vamadeva, banking analyst at Al Futtaim HC Securities.

"Even when economic conditions improve, liquidity is likely to limit lending activities in Dubai as capital markets will remain switched off for some time," Vamadeva said.

ADCB is expected to post a fourth-quarter loss of 88 million dirhams, according to Shuaa Capital, on higher loan provisions.

NBK Capital estimates that ADCB is the most exposed of Abu Dhabi-based banks to Dubai's economy, with around 37 percent of its loan book in the indebted emirate.

"ADCB has been hit on many fronts," said NBK Capital analysts. "In addition to a material exposure to the two Saudi groups, we believe ADCB has significant exposure to the UAE economy."

Dubai-based Emirates NBD, the region's largest bank by assets, is expected to post 89 million dirhams in fourth-quarter net profit, according to EFG Hermes' estimates, up from 14.8 million in the year-ago quarter when the bank was hit by investment losses and provisions against bad loans.

National Bank of Abu Dhabi and First Gulf Bank are expected to fare better than their Dubai counterparts, potentially posting an increase in profits, as they bear limited exposure to Dubai World.

Outside the UAE, analysts at Credit Suisse highlight Saudi Arabia and Qatar as the banking sectors expected to outperform.

"In 2010, we believe the banking sectors of Saudi Arabia and Qatar are likely to benefit from the relatively higher increases in forecast spending," Credit Suisse said. Credit Suisse is more upbeat on the region's banks in the second half of 2010, as credit costs could start falling again and lenders could benefit from rising global interest rates.

Other analysts expect banks' profits will remain lacklustre throughout 2010.

"We expect provisioning by all banks to be high in Q4 2009 and for it to remain significant in FY2010, continuing to place the biggest damper on banks' profitability," NBK Capital said. (Reuters)

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