Abu Dhabi banks stronger on faster loan growth

Abu Dhabi banks are posting stronger earnings than Dubai-based lenders as lending in the United Arab Emirates’ capital increases and the highest provisions for more than a year curb profit for banks in the second-largest emirate.

Abu Dhabi’s three largest banks posted better-than- expected profit in the third quarter, while Dubai-based Emirates NBD, the UAE’s biggest lender by assets, missed estimates. Provisions for non-performing loans in the the Arabian Gulf nation rose 14 per cent in the first nine months of 2011 to Dh50.4 billion ($13.7 billion), the highest since at least April 2010, when Bloomberg began tracking the country’s banking data.

“Banks in Abu Dhabi have suffered much less from their exposures to government-related issuers and are still managing to grow their loan books in what is a subdued operating environment,” said Khalid Howladar, a senior credit analyst at Moody’s Investors Service in Dubai. “Profitability for Dubai banks will continue to be suppressed for the coming quarters on the back of reduced loan growth and continued provisioning.”

UAE banks are starting to recover from the worst financial crisis since the 1930s, which curbed lending and forced them to take provisions against some of Dubai’s government-related entities. State-controlled companies including Dubai Holding LLC and Drydocks World LLC are still in talks with lenders to restructure debt.

The default risk of Dubai, which isn’t rated, was unchanged at 420 basis point on November 2, according to data provider CMA, which is owned by CME Group Inc. That’s almost four times higher than Abu Dhabi’s, which was at 110 basis points, according to CMA, which compiles prices quoted in the privately negotiated market.

The yield on Dubai’s 5.591 per cent dollar bond due June 2021 fell 6 basis points, or 0.06 of a percentage point, in October to 5.68 per cent. It advanced to 5.91 per cent since then. The yield on Abu Dhabi’s 6.75 per cent dollar bond due August 2019 dropped 21 basis points last month to 3.43 per cent. It has since risen to 3.58 per cent.

The average yield on GCC bonds declined 20 basis points in October to 4.8 per cent, according to the HSBC/Nasdaq Dubai GCC Conventional US Dollar Bond Index.

Emirates NBD PJSC profit declined 59 per cent in third quarter as the impairment allowance for bad loans jumped 27 per cent to Dh1.57bn. The bank said it expects its impaired loan ratio to peak at 15 per cent to 16 per cent in 2013 compared with 12.9 per cent at the end of September.

“ENBD clearly had much higher provisioning than expected due to its Dubai Holding exposure,” said Ankur Shah, analyst at Arqaam Capital. “A few of the Abu Dhabi-based banks also have this exposure, but chose not to take the provision for Dubai Holding this quarter because they wanted to wait for the restructuring to be complete.” Provisioning will remain “elevated for the Dubai banks well into 2012,” he said.

Banks in Abu Dhabi, the fourth-largest oil producer in the Organisation of Petroleum Exporting Countries, have mostly posted third-quarter earnings that beat analyst estimates.

National Bank of Abu Dhabi, the United Arab Emirates’ second-biggest bank by assets,said profit increased 12 per cent to 1.03bn as gains from foreign-exchange transactions offset investment losses. Abu Dhabi Commercial Bank, the country’s third-biggest lender by assets, reported a 91 per cent jump in profit, helped by a fall in interest expense and provisions, while First Gulf Bank, controlled by Abu Dhabi’s ruling family, showed an 8 per cent gain.

“In the UAE, third-quarter profits have mainly been driven by trends in volume growth and provisions,” said Giyas Gokkent, senior economist at the National Bank of Abu Dhabi. “In terms of volumes, assets of top five listed banks in Abu Dhabi grew by 8.6 per cent year-on-year compared with a 1.5 per cent decline in the assets of top four listed Dubai banks.”

In terms of loan growth, Abu Dhabi’s top five listed banks posted 6.5 per cent increase compared with 3.5 per cent in the overall sector, Gokkent said.

UAE bank loans exceeded deposits for the first time in a year as deposits dropped Dh11.1bn in September from August, central bank data showed on October 27. Loans surpassed deposits by Dh7.9bn in September, the first time they have since September 2010.

Banks in Dubai are expected to have done most of their provisioning by the end of the year, said Moody’s Howladar. Non- performing loans at UAE banks are expected to peak at about 14 per cent this year, he said. In March, Howladar said he expected NPLs to peak at 12 per cent.

“Growth in the second half of the year has been a bit weaker than expected due to more global economic stresses,” he said. “Abu Dhabi problem loan levels will be broadly lower than Dubai levels.”

Non-performing loans in Dubai ranged from 8 percent to 10 per cent at the end of 2010, according to Moody’s. Of that, distressed loans to Dubai’s government related entities made up 3 per cent or 4 per cent. Banks set aside about $500 million to cover losses from Dubai World’s restructured loans, the International Monetary Fund said in May.

“Higher volume growth is likely to persist for Abu Dhabi based banks compared to other banks in the UAE given Abu Dhabi’s 2030 plan and profitability will be affected positively by growth in volume,” said NBAD’s Gokkent. “Beyond that, the key driver in the near term with regards to profitability will be the path of provisions.”

Abu Dhabi is planning to spend $500bn by 2030 to reduce its dependence on energy resources and build up industries from transportation to real estate.