Analysis: Lending takes a back seat

As most leading banks remained focused on repairing tainted loan books, loan growth has been negligible across the sector: according to the latest statistics from the UAE central bank, about 0.8 per cent during the first six months of the year compared with 1.5 per cent in the first half of last year and 24 per cent in the same period in 2008.

Analysts said most banks had become extremely risk-averse, their priority being to keep non-performing loans to the minimum.

"We expect loan growth to remain under pressure for the rest of the year. Much of the risk aversion on the part of banks stems from uncertainty about potential future losses and write-downs," said Sofia Boury, a banking analyst at Shuaa Capital.

Most leading banks reported a decline in profit growth in the second quarter. Earnings were impacted by the virtual stagnation of balance sheet growth and substantial write-downs on loans and investment impairments.

Emirates NBD's non-performing to total loan ratio (NPL ratio) rose to 2.88 per cent from 2.63 per cent in the previous quarter. Coverage ratio (loan-loss provision to NPL) increased to 117 per cent from 102 per cent.

"We have been conservative in our approach to provisions relating to portfolio impairments, although no specific provisions have been made to assets relating to Dubai World," said Rick Pudner, Chief Executive Officer, Emirates NBD, during a conference call.

However, analysts said the huge general provisioning of Dh750 million by the bank in the second quarter is a buffer against a potential increase in Dubai World-related impairments that could hit the balance sheet in the next two quarters.

"We believe the bank has provided for the bulk of its exposure to Dubai World in the second quarter in general provisioning, as it did last year for the Algosaibi exposure," said Janany Vamadeva, an analyst with HC Brokerage. The bank has already provided for approximately two-thirds of its exposure to Saad and Algosaibi.

Abu Dhabi Commercial Bank (ADCB) made net provisioning of Dh1,098 million in the second quarter. The NPL ratio on June 30 stood at 5.4 per cent. The bank has an exposure of Dh6.6 billion to Dubai World, which is subject to the restructuring proposal currently being finalised. "The increase in NPLs (in the second quarter) is largely due to early reporting of Dubai World provisions of Dh1,035 million, which we expected in the third quarter," said Raj Madha, an analyst with Rasmala.

Larger banks that reported higher profits were seen making lower provisions. National Bank of Abu Dhabi (NBAD), the UAE's largest bank by market capitalisation, reported a 10.4 per cent rise in second-quarter profit to Dh1 billion compared with Dh907 million in the counterpart period last year.

"NBAD's second-quarter profits were above our projections. We think this is largely due to the bank making lower provisions in the second quarter. We expect the provisions to be higher for the rest of the year," said Germaine Benyamin, a senior analyst at Al Futtaim HC Securities.

Shuaa Capital, which conducted a stress test on eight leading UAE banks recently, said despite the rise in NPLs of some of the banks, they are capable of absorbing these and portfolio impairments, thanks largely to the authorities' efforts to strengthen banks' balance sheets since the onset
of the crisis.

"The non-performing loan ratio is expected to rise from 3.3 per cent to 8.4 per cent, while total capital adequacy ratio (CAR) remains healthy at 14.9 per cent, and Tier-1 capital remains above regulatory requirements at 9.8," said Shuaa's Al Boury.

The riskiest assets on the banks' balance sheets include real estate and personal loans extended in 2008, potential losses associated with banks' exposure to the Saad and Algosaibi groups and the Dubai World, and renegotiated loans that appeared on most banks' financials last year.

Shuaa Capital analysts said additional capital injections would be required for individual banks, ranging from Dh2.5 billion in the base-case scenario and up to Dh15.8 billion in the worst case. In the base-case scenario Emirates NBD and ADCB would be the only banks needing that injection, a combined Dh2.5 billion of additional Tier-1 capital to meet the stringent UAE requirements.

By contrast, some of the stronger banks such as NBAD, First Gulf Bank and Union National Bank are better capitalised, and their books are largely free from the riskier assets that afflict their peers.

"NBAD already uses the 90-day overdue rule for NPL classification and would, therefore, not be impacted should the central bank impose a mandatory norm of 90 days (many UAE banks adopt the 180-days definition currently)," said Mohammad Hawa, a banking analyst with Credit Suisse.

For banks that are facing medium-term liquidity issues related to rising provisioning, analysts are recommending government help.

"In our view, additional measures could be taken by the authorities to ‘clean up' balance sheets and encourage banks to resume lending," said Khatija Haque, an economist at Shuaa Capital.

"We also see merit in supply-side measures to encourage bank lending, such as government guarantees to support financing to sectors and businesses with long-term strategic importance."

The writer is Deputy Business Editor, Gulf News.