Banks in a stronger position to face a global crisis

Dubai: UAE banks are now in a stronger position than in 2008 to withstand another global downturn that could stem from the European debt crisis, said George T. Abed Senior Counsellor and Director of IIF's Africa Middle East Department.

"The main catalyst of the projected solid growth next year is the expected turnaround in the real estate market," said Abed.

The real estate market in the UAE appears to have bottomed out, and significant progress has been made in corporate restructuring and in governance.

The 12-month growth in deposits (from both residents and non residents) peaked in June 2011 at about 16 per cent and then decelerated to 7.3 per cent in August. Meanwhile, lending to the private sector remains subdued at 2 per cent, year-on-year. The loan-to-deposit ratio declined from a peak of 109.5 per cent at end-2008 to 93 per cent in May 2011, and then rose again to 98 per cent in August.

"Credit growth in the UAE continues to lag that of Qatar and Saudi Arabia, where private sector lending growth [year-on-year] was close to 15 per cent and 10 per cent, respectively. Higher provisioning continues to hinder private sector credit growth.

Provisions

The combined provisions of banks rose from the equivalent of $6.8 billion (Dh24.96 billion) at end-2008 to $17.5 billion at end-August 2011. The current provisions cover 81 per cent of NPLs, assuming that NPLs account for 7.5 per cent of total loans.

"Data suggest that the NPLs have peaked for most banks, but for a few more quarters we could expect rising provisions with the overall provisions rising to about 8.5 per cent of total assets," said Abed.