Dubai: Already contending with the fallout from the Eurozone crisis and high provisions for bad loans, banks in the UAE face a further challenge in the second half of the year — new central bank regulations that may further curb their sluggish lending growth.
While there have been exceptions — First Gulf Bank saw its loans grow 5.9 per cent in the first half — UAE central bank data show total loans and advances in the system grew by just 1.8 per cent in the first six months of 2012.
Lending growth is a key driver of the UAE banks’ profits, and analysts fear any chance of a revival could be further delayed by a recent central bank circular that caps lending to local governments and related entities at 100 per cent of capital, with effect from end of September. Another regulation requires banks to have at least 10 per cent of their liabilities in liquid assets by the end of the year.
The regulations may prompt banks to reduce lending to governments and focus for the remainder of the year on building up liquid assets instead of making new loans, analysts say.
UAE banks face several challenges “but if I had to pin-point the most dominant theme, that would be the new tighter regulatory era that UAE banks have entered into” with the new central bank regulations, Naresh Bilandani, a financial sector analyst with JPMorgan in Dubai, said.
Seeking exemptions
National Bank of Abu Dhabi and Emirates NBD, the two largest banks in the UAE, will have to greatly reduce their lending to government entities or else seek exemptions from the central bank regulations due to the high level of their lending. Even if they get exemptions, the two banks are likely to have to curb future government lending.
Analysts at Invest AD in Abu Dhabi said in a note today that they expected only a gradual increase in lending this year, partly as a result of the new central bank caps. Combined with still-muted activity in the broader economy, this poses a challenge for banks, Shabbir Malek, an analyst at Egypt’s EFG Hermes who is based in Dubai, said.
“I think the level of activity still remains subdued, and as a result of that, we are not seeing any acceleration in loan growth,” he said. “Secondly, there have been some changes in the regulatory environment, so I think banks are assessing the impact of these regulations and making sure they have enough capital and enough liquidity to achieve those new regulations,” Malek added.
Provisions for non-performing loans at all UAE banks combined reached Dh61.7 billion at the end of May, according to central bank figures, up from Dh47.1 billion a year before.
But Malek said UAE lenders will likely see a gradual drop-off in provisions once the Dubai Group restructuring is resolved. This is the last major debt restructuring in Dubai following the resolution of Dubai World’s $25 billion deal last year.
“There are some clients which the banks would need to provide for this year,” Malek said. “Once those are through, I think we’re very near the peak or past the peak in terms of provisions. I think provisions should start coming down in the next six months.”
