Ripe for the return of optimism

The full-year financial results of UAE banks for 2010 point to a slow but steady recovery in the sector, bolstered by declining loan losses and portfolio impairments and rising liquidity resulting from improving deposits.

The UAE Central Bank's monthly banking indicators for December 2010 reported that the total provisions for non-performing loans (NPL) of the banks operating in the UAE increased 36 per cent to Dh44.3 billion last year, compared to a 65.5 per cent increase in 2009.

Bankers and analysts say that after going through a prolonged period of balance sheet repair the business environment is ripe for loan growth. "[We have] a relatively optimistic outlook for 2011. In particular, lending growth is expected to resume stronger than last year while provisioning efforts should subside, hence improving the UAE banking system's fundamentals and overall risk profile within the GCC universe," said Sofia El Boury, banking analyst with Shuaa Capital.

Performance review

Emirates NBD (ENBD), the UAE's largest bank by assets, reported its fourth-quarter profit as more than doubled, as provisions shrank 79 per cent to Dh201 million. Net income advanced to Dh403 million from Dh178 million. For the full year the bank reported Dh2.33 billion net profit, down 30 per cent compared to the Dh3.34 billion recorded in 2009.

The bank's headline loan-to-deposit ratio of 99 per cent at year-end 2010 compared with 118 per cent previously. "During the year we have achieved significant success in positioning the bank for future growth opportunities through an improved funding and liquidity position, and strengthened capitalisation. We are expecting 5 per cent loan growth this year," said Rick Pudner, CEO, ENBD.

While Abu Dhabi Commercial Bank (ADCB) managed to return to profitability, generating net profits of Dh391 million (from Dh513 million net loss in 2009), National Bank of Abu Dhabi (NBAD) reported net profits of Dh3.68 billion, up 22 per cent year-on-year.

NBAD's bad loan provisions declined 9.6 per cent year-on-year to Dh1.2 billion in 2010. While ADCB's net loan impairment for 2010 was up 12 per cent at Dh3.2 billion, for the fourth quarter of last year it was at Dh647 million compared with Dh2 billion in the fourth quarter of 2009. The bank's bad loan provisions were largely driven by its Dh6.6 billion exposure to Dubai World and a significant exposure to Saudi Arabia's Saad and Algosaibi groups.

Analysts say significant decline in loan impairment provisions of banks such as NBAD, ADCB and Emirates NBD shows the positive results of balance sheet repair initiatives by many banks.

"ADCB's provisions declined 69 per cent year-on-year to Dh647 million in the fourth quarter. On a full-year basis, provisions were at Dh3.3 billion, down 12 per cent," said Mohamad Hawa, an analyst with Credit Suisse.

While most banks are preparing for balance sheet expansion in 2011, some banks, such as Emirates NBD, expect their loan impairments as a percentage of gross loans (NPL ratio) to increase this year in the context of more loan restructurings announced by Dubai Holding and its subsidiaries. The bank reported a loan impairment ratio of 10 per cent in the fourth quarter of last year from 8.1 per cent in the third quarter. For 2011 it expects the NPL ratio to be in the range of 14-15 per cent.

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Loans and deposits 

Despite efforts by the Central Bank to boost liquidity in the banking system, credit in 2010 stagnated in lower single digits, compared to average growth rates in excess of 30 per cent between 2004 and 2008. Loan growth for the whole of last year was marginal at 1.3 per cent, from Dh1 trillion in 2009 to 1.03 trillion.

"This, in our view, indicates banks' persistent caution towards new lending while conveying their desire to preserve a comfortable liquidity cushion," said El Boury.

Central Bank statistics show there has been a significant improvement in deposits in the fourth quarter, as for the third consecutive month deposits exceeded loans in December.

Total assets of the UAE banks together exceeded Dh1.6 trillion last year, compared to Dh1.51 trillion in 2009; total deposits were up 6.8 per cent at 1.04 trillion, from Dh982 billion. The sluggish loan growth, coupled with flat deposit base, translated to an end-2010 loans-to-deposits ratio below 100 per cent at 98.3 per cent, a significant improvement from 103.6 per cent in 2009.