Comment: Steady procession

While some banks have managed to produce relatively upbeat numbers despite the lingering crisis that has beset many of the world's leading financial centres, others have been less fortunate.

For those particularly badly hit by large exposures to struggling corporates, falling property prices, and non-performing personal loans, a return to normal trading seems some way off. 

Leading the way among those turning in a creditable performance in a subdued environment are Abu Dhabi's two largest banks. National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) reported strong improvements in net profits, up 21.1 per cent and 11.9 per cent respectively.

Banks from the smaller emirates also achieved strong results. National Bank of Fujairah (NBF) increased net profits by 36.7 per cent at the same time partly due to a reduction in operating costs, leading to its costs-to-income ratio coming down to 36.7 per cent from 50.9 per cent last year. The National Bank of Ras Al Khaimah (RAKBANK) also saw impressive improvement, with net profit increasing by 36.2 per cent compared to the same period last year, reflecting, according to the bank's general manager, “the growth in the bank's customer base across a wide range of personal and small business segments”.

Islamic banks

Islamic banks fared among the better. Abu Dhabi Islamic Bank (ADIB), the second-largest Islamic lender in the UAE, reported a 28.8 per cent increase in net profits, reflecting increased operating revenue due to increased demand for Sharia-compliant products and a reduction in provisions.

For those banks caught up in Dubai's most high-profile corporate restructuring, the situation has been less favourable. Two of the country's largest banks, Emirates NBD (ENBD) and Abu Dhabi Commercial Bank (ADCB), are thought to hold the largest local exposures to the indebted conglomerate Dubai World.

ENBD reported a fall in net profits of 28.3 per cent over the corresponding period last year to Dh1.5 billion. The fall reflected an increase in impairment allowances and an 11.4 per cent decrease in total operating income. But ENBD continued to make progress in reducing costs — down 13 per cent over last year's first half — which included the realisation of further integration synergies.

ADCB reported a net loss of Dh595 million in the first half as against a profit in the first six months of last year of Dh657 million. The result at the operating level showed an increase of 6.7 per cent. It was provisions and impairments of close on Dh2 billion, particularly those associated with the bank's exposure to Dubai World, that took the bank's bottom line into negative territory.

Specific provisions

The scale of the downturn across much of the sector is evident from the size of the provisions. Taking the industry as a whole, data from the Central Bank show specific provisions for non-performing loans of Dh36.9 billion in June this year, a 54 per cent increase over the same point last year.

There may be more to come. Industry analysts say that it can take two years after the start of a downturn for non-performing loans to peak. That means the second half of this year in principle could see further deterioration.

It's hardly surprising that banks remain cautious, that being reflected in zero-to-negative growth in lending in many balance sheets. Central Bank figures show that total bank lending increased by less than 1 per cent in the first half of this year, only 3 per cent up on the figure at the end of 2008.

As with profitability, there is considerable variation in balance sheet growth across the industry, notably between the large Abu Dhabi banks and their counterparts in Dubai.

While ENBD's and Mashreqbank's customer loans fell by 5.4 and 9.7 per cent respectively, Abu Dhabi's leading banks — benefiting from large corporate lending and project financing for government and quasi-governmental institutions — saw lending increase.

Loans and advances at NBAD rose by 8.7 per cent, at FGB by 21.9 per cent over the corresponding period in 2009. FGB has profited from acting as an agent for a government-subsidised loan scheme aiming to boost demand for property among Emiratis, which accounts for 8 per cent of the bank's overall loan book, and helped push loan growth up by one-third, according to analysts' comment.

With only a few exceptions, the UAE's banks remain well capitalised, with ongoing improvement achieved over the past six months. ENBD's capital adequacy ratio on a Basel II basis strengthened to 19.6 per cent, from 18.7 per cent at the end of last year, having benefited from strong retained earnings. Mashreqbank's capital adequacy ratio measured on the same basis improved to 21.5 per cent as against 20.2 per cent.

While the worst of the financial crisis appears to be over, it could be some time before provisions are scaled back and banks regain confidence in lending. But, for all the drama of the past two years, UAE banks have been operating with the benefit of a not-insignificant safety net of knowing that state-backed Dubai companies, such as Dubai World, will not be allowed to fail. 

Banks are already looking to a brighter future. Emirates NBD states in its half-year results that ‘good progress is being made in resolving key debt restructuring, and expected resolution during the next half year is expected to improve confidence and activity'.
2011 could be the year when banking reverts to type, and becomes less unnervingly exciting.

The writer is a freelance journalist.