Business | Banking

UAE banks show high lending level

Benefit from inherent strength of business banking

  • By Babu Das Augustine, Deputy Business Editor
  • Published: 00:00 May 13, 2010
  • Gulf News

  • Image Credit: Gulf News Archive
  • Institutions must look at risks carefully with regard to lending, but I am not overly concerned on this front because banks in the UAE are mainly retail commercial banks, says Sultan Bin Nasser Al Suwaidi.

Dubai: UAE banks are very solid with high liquidity and are continuing to show signs of relatively high lending activity, UAE Central Bank Governor Sultan Bin Nasser Al Suwaidi was quoted as saying by the Oxford Business Group (OBG) yesterday.

In a recent interview with the OBG the central bank governor dispelled concerns UAE banks could become risk averse.

"Institutions must look at risks carefully with regard to lending, but I am not overly concerned on this front because banks in the UAE are mainly retail commercial banks," he said. "This means the system benefits from the inherent strength of business banking, while also having the advantages associated with retail. Against this backdrop, UAE banks are very solid with high liquidity and a Central Bank which is supportive."

During the first quarter most banks reported better than expected net profits and the Abu Dhabi banks were higher than consensus by 23.4 per cent on aggregate. Analysts say the non-performing assets ratios of UAE banks will increase through 2011 but expects asset quality of Abu Dhabi banks to improve over the next year.

"National Bank of Abu Dhabi's asset quality is the best with a first quarter non-performing loan (NPL) ratio of 1.33 per cent and coverage of 161 per cent. We estimate the average NPL ratio [of Abu Dhabi banks] to increase from 2.4 per cent in 2009 to 3.6 per cent in 2011," said Mohammad Hawa, an analyst with Credit Suisse.

However, with the high exposure of Dubai-based banks to Dubai World and other corporate debts, analyst fear the asset quality of some banks will adversely impact lending.

"We expect loan growth to be soft during the course of the year due to the cautious approach taken by banks amid deteriorating asset quality and liquidity issues. Banks still face issues as seen in the increase in interbank rates," said Janany Vamadeva, an analyst with H C Brokerage.

Speaking about the slow loan growth in the country Al Suwaidi said although the Central Bank had issued timely advice urging banks to weigh up the risk element when giving loans, he had no major concerns this advice could lead to the sector becoming too cautious. Analysts see slow loan growth.

"The full impact of the real estate correction in the country has not yet filtered through the banking system. Also, ongoing negotiations with Dubai entities is adding a large element of uncertainty," said Deepak Tolani, an analyst with Al Mal Capital.

Al Suwaidi acknowledged the conservative labelling of loan to deposit ratios adopted by the banking system.

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