UAE banks may need more government funds – report

Shuaa Capital's UAE bank stress test shows lending to private sector is still low.
UAE banks may need more government funds – report
CONCERN: Several UAE banks may require up to $4.3bn in additional funds from the authorities, according to new a stress test report.
By Shane McGinley
Sun 01 Aug 2010 01:57 PM

While banks in the UAE are “sufficiently capitalised”, several banks may require up to AED15.8bn ($4.3bn) in additional funds from the authorities, according to a stress test report announced on Sunday by Shuaa Capital.

The “UAE Banks Put To The Test” report, carried out by Dubai-based investment services provider Shuaa Capital, concluded that the UAE banking sector as a whole “is sufficiently capitalised”. However, it forecast that “several banks would need additional capital injections to meet the Central Bank’s regulatory requirements in all given scenarios.”

The report looked at a number of potential scenarios, “ranging from AED2.5bn ($669mn) in our base case up to AED15.8bn ($4.3bn) in our worst case.”

Shuaa’s added that, if such capital is needed, the government will be in a position to provide the necessary recapitalisation, “as the government has already stepped in to provide financial support to some UAE banks at the height of the financial crisis.”

Eight banks, which amount to 70 percent of the banking assets in the UAE, were covered in the stress test, including Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Mashreqbank, First Gulf Bank, Dubai Islamic Bank, Union National Bank and Commercial Bank of Dubai.

The biggest threats to the UAE banks’ balance sheets were identified as: real estate and personal loans extended in 2008, loans restructured in 2009 and banks’ exposure to Saad, Al Gosaibi and Dubai World.

While the “worst of the recession appears to be over,” the report pointed out that “local banks remain risk averse and reluctant to extend credit to the private sector due to concerns around future losses and write downs.”

Figures from the UAE Central Bank showed that bank lending in the emirate grew by only 0.8 percent during the first six months of the year, compared to 1.5 percent and 24 percent during the same periods in 2009 and 2008 respectively.

In a bid to encourage the banks to increase their lending to the private sector, the report recommends “the UAE authorities implement broad structural and economic reform to encourage private sector and foreign investment.”

The UAE’s banks have seen a slump in their profits as a result of the global credit crisis and a downturn in Dubai’s real estate sector.

Last week, Emirates NBD, the UAE’s biggest bank, revealed that it had it had set aside another $750m in the first half of the year in order to cover any expected loan provisions, such as exposure to the restructuring of indebted government-owned conglomerate Dubai World.

Emirates NBD, one of the biggest lenders to Dubai World, reported a 28 percent decline in net profit for the first half of 2010. Compared to the same period in 2009, net profit fell to AED1.5bn ($408m), while total income was AED4.9bn ($1.33bn), down eleven percent compared with the first half of 2009.

On Saturday, Abu Dhabi Commercial Bank (ADCB) also announced that it had AED6.6bn ($1.8bn) worth of exposure to Dubai World posted a second-quarter loss of AED531m ($144.58m) in the second quarter, compared to a net profit of AED295m ($80.32m) in the same period a year ago.

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