UAE banks top realty exposure

Dubai: The UAE's banks have the highest exposure to the real estate sector among its regional peers and it has cast doubts on the asset quality of many banks, according to analysts.

While banks in Kuwait and the UAE have the highest exposure to the real estate sector, Saudi Arabia's banking sector has the least real estate exposure, at just 7.5 per cent of total loans according to a recent report from Credit Suisse.

Statistics up to the first half of 2008 show about 31 per cent of total loans of Kuwait's banks is exposed to real estate while latest estimates by Credit Suisse points that the UAE banks have comparatively higher exposure to the sector.

"It is likely that a significant part of corporate and personal loans has been invested in real estate. We believe that the true exposure for UAE may lie around 35 per cent of total loans," said Mohammad Hawa and Digvijay Singh, research analysts with Credit Suisse.

Banking industry experts say that a high loans-to-deposit ratio, combined with high exposure to real estate, makes UAE banks more vulnerable to loan defaults. International rating agencies such as Moody's and S&P say a sharp sector correction will have a big impact on banks as many banks have significant exposure to the sector.

"Plunging oil prices, an economic slowdown, the falling stock market and pressure on real estate prices are raising major hurdles for the banks. Looking forward, these factors are expected to lead to a major slowdown in business growth and deterioration in asset quality and profitability," said Standard and Poor's credit analyst Emmanuel Volland.

According to the Credit Suisse report, the UAE banks have the highest funding gap in the region, with their average loan-to-deposit ratio being 122.8 per cent against the central bank ceiling of 100 per cent.

Among the UAE banks, Abu Dhabi Commercial Bank has the highest loan-to deposit ratio of 147.2 per cent, followed by Emirates NBD at 121.8 per cent.

Although Gulf banks in general are well-capitalised with low leverage ratios (total assets to total shareholders' equity) compared to US and European banks, analysts expect that shortage of long term funding sources will compel them to shrink (deleverage) their asset size.

"GCC [Gulf Co-operation Council] banks need to undergo a period of de-leveraging. We think that access to wholesale funding has become difficult and costly. We therefore expect GCC banks to deleverage their balance sheets," Credit Suisse analysts said.

Over the past two months, most banks in the UAE have become cautious in lending. As the de-leveraging process continues, the margins are likely to take a hit.

This is due to the constraint on credit growth and the rising marginal cost of funding. In the UAE, banks are currently offering up to seven per cent on time deposits against less than two per cent a few months ago bringing down margins on retail loans substantially.