Banks face tougher times as caution grips lending

Dubai: Though the apparent lack of funding is hitting the banking sector, the indirect impact related to the downturn in the property market is a greater issue, a report released by EFG-Hermes said.

The property market is expected to face even harsher times, as prices weaken due to a strong US dollar.

With local banks having a high exposure to the falling real estate market, even with a low mortgage exposure, a further downturn is expected.

Many developers rely heavily on bank finance. With the existing gloom over the sale of property and cancellation of projects, the banks will face the brunt of the crisis.

"Property-related income is likely to go into arrest. In general, we will assume a 30 per cent mark down on property in estimating any losses," the report said.

Falling assets prices negatively affect all capital market revenue streams, including trading, investment and asset management.

"Many banks also have direct property exposure which will now have reduced revaluation upside or increased revaluation downside," the report said.

Raju Menon, managing partner of investment advisory firm, Morison Menon Chartered Accountants, said bankers will now be cautious, even after a certain level of recovery.

"This is a lesson for bankers here. They have to be more cautious and cannot continue financing the same way as they did before," Menon said.

Though the banks had low mortgage exposure, the current crisis will impact their financing decisions in the future, Menon added. "Premium financing will not happen. Banks will be more cautious with lending even after the situation improves. Rates will come down," he said.

According to the report, the risks taken by the property investors will prove to be a limiting factor in the recovery of the market.

"The chain of activity and money flow are now broken in the banking market. Linking it back will take a long time, unless an external force pumps in money. This is what the government needs to do," said Menon.