Slow loan growth will continue as realty woes linger

Dubai: The first quarter results of UAE banks show that the majority of banks are in no hurry to expand their loan books.

Bankers said slow loan growth has not been all that bad. In most cases, marginal growth in loans combined with stronger growth in deposits has seen the loan to deposit ratios improving.

Sustained provisions and conservative approach to lending have strengthened the balance sheets of most banks.

Emirates NBD, for example, booked an impairment charge of Dh1.37 billion in the first quarter compared with Dh555 million in the first quarter last year. Its portfolio impairment allowances increased by Dh628 million to cover future contingencies, taking the total allowance to Dh2.8 billion.

Debt overhang

"ENBD used the special gains to strengthen loan loss reserves. Loan loss reserves now stand at 45 per cent of impaired loans All in all, operationally a little weak quarter, but ENBD is now better provisioned vs year-end 2010 thanks to the gain on Network International," said Jaap Meijer, head of the bank team, AlembicHC.

The Interantional Monetary Fund in its latest regional economic outlook said that UAE banks are recovering fast from the impact of the financial downturn, but are likely to face pressure on balance sheet expansion due to loan and portfolio impairments in the real estate sector.

"While the equity markets continue to underperform, the property sector recovery is a long shot. The debt overhang of state-owned entities combined with the possibility of more corporate restructuring is likely to keep banks more cautious," said Masoud Ahmad, Director of the IMF's Middle East and Central Asia Department.

Improved confidence

Bankers agree. "In the context of the ongoing discussions of a few more corporate restructurings, we expect the impaired loans ratio to be in the range of 13 to 14 per cent for the full year," said Surya Subramanian, Emirates NBD's chief financial officer.

Some analysts said the current upheaval in the region may have had a positive impact on the banking system in the UAE because of some diversion of capital from troubled countries.

Total deposits (including resident, non-resident, and government deposits) have risen significantly in recent months, by 14.3 per cent in the year to this March.

More than half of the increase was in time and savings deposits in local and foreign currencies.

"In our view, this increase in longer-term deposits reflects improved confidence in the UAE economy following Dubai World's successful debt restructuring and the subsequent bond issues by the government of Dubai and a number of government related entities," said Garbis Iradian, Deputy Director, Africa Middle East Department of the Institute of International Finance.