The crippling effects of the global financial crisis have dramatically transformed the way banks in the UAE do business as attested by their tight lending policy, particularly towards the private sector, investment bank Shuaa Capital mentioned in its latest report.
Erring on the side of caution, domestic banks have remained “risk averse and reluctant” to extend credit to the private sector for fear of incurring possible future losses and write-downs, Shuaa wrote in its “UAE banks put to the test” report, which was released on Sunday.
Quoting official figures from the UAE Central Bank,
Shuaa noted that bank loans in the country grew by a meagre 0.8 per cent during the first half of 2010, down from 1.5 per cent in the same period of 2009 and a far cry from the 24 per cent posted in the first six months of 2008.
Gone are the days of “name lending”, where financial institutions willfully approve loans to famous personalities in the region without conducting background checks or requiring collateral. Bank leniency eventually brought shock waves to the region, where exposures to the
Saad-Algosaibi debacle in Saudi Arabia and the
Dubai World debt issue did not only hurt businesses’ pockets, but dampened investor confidence as well.
Because of recent incidents of credit defaults, local banks’ earnings have also suffered a setback as they allot higher provisions against bad loans. Mashreq Bank, for instance, recorded a nearly 54-per-cent drop in second-quarter net profit with Dh202 million ($55.01m) from Dh434.9m in the second quarter of 2009. Emirates NBD’s second-quarter profit plunged 53 per cent also because of higher bad loan provisions.
“In our view, additional measures could be taken by the authorities to ‘clean up’ UAE banks’ balance sheets, to restore confidence and encourage banks to resume lending to households and businesses,” the report said.
Shuaa has recommended the use of the Irish approach of removing high-risk assets from balance sheets and replacing them with low-risk government securities.
The investment bank further explained that by adopting such approach, UAE banks “would be in a much stronger position to resume lending to key sectors of the economy and support the nascent economic recovery.”
Local banking system ‘survives’ stress test
Shuaa Capital’s latest report also focused on the “stress test” conducted on eight local banks, namely: 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. These banks represent about 70 per cent of the country’s banking system assets in 2009.
The report took note of the fact that “Dubai-based banks incur a higher risk associated with their real estate exposure than Abu-Dhabi based lenders.” Aside from real estate assets, other factors that were taken into account in the stress test were personal loans extended in 2008, potential losses associated with exposure to Saad, Algosaibi and Dubai World, as well as “renegotiated loans” in 2009.
Despite the challenges that the local banking sector has experienced since the start of the global economic slump, Shuaa Capital believes that UAE banks are sufficiently capitalised.
“Our base case suggests that UAE banks are, on average, capable of absorbing the
potential losses associated with more stringent default assumptions, thanks largely to the
authorities’ efforts to strengthen banks’ balance sheets since the onset of the crisis,” the report said.
Government cash injection may be required
The eight local banks may be generally buffered from near-term fallout, but Shuaa did not discount the possibility of some banks requiring capital injections to meet the UAE Central Bank’s regulatory requirements.
According to the report, five out of the eight banks would need combined core capital injections of about Dh15.8 billion ($4.3bn).
“However, in this (unlikely) event, we have no doubt that the UAE authorities would provide the required financial support to these banks, particularly as the government has already stepped in to recapitalise some UAE banks at the height of the financial crisis,” Shuaa wrote.
Consider also reading:
UAE banks' capital needs manageable: Shuaa
Moody's says UAE banks outlook still negative
UAE banks face 10-20pct Dubai World losses
UAE banks' problem loan ratio may rise 4pct
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