Dubai: Loan loss provisions in the UAE’s banking industry are on decline, supporting the overall asset quality metrics. However, continuing stress in some of the sectors and the implementation of International Financial Reporting Standards 9 (IFRS 9) are likely to keep provisioning elevated in a few more quarters, Vince Cook, CEO of National Bank of Fujairah (NBF) told Gulf News.

“I don’t think we are fully through with that experience [spike in provisions]. There are clear signs of improvement. At the macro level, higher oil prices helps the general economy. However, it is not fed into all of the areas that were stressed. We still see a number of customers still get into difficulties. We are not in a situation that we could say everything is fine, but the good thing is that there have been significant improvement and there are enough businesses that are healthy and profitable that support overall growth,” Cook said.

NBF reported a net impairment provision of Dh209.7 million for the first six-month period in 2018 based on the IFRS 9 accounting standard, compared to Dh157.6 million in the corresponding period of 2017. The NPL ratio improved to 5.3 per cent from 5.5 per cent as at December 31, 2017. Total provision coverage ratio (including credit risk reserve) improved from 89.5 per cent to 99.2 per cent as at 31 December 2017.

“The increase in the provision level is partly a reflection of increase in business volumes and balance sheet growth and IFRS 9 also influences the provision numbers as it accelerates the level of provisions to be recognised compared to Central Bank of UAE (CBUAE) regulations,” said Cook.

The drastic change in reporting standards that came into effect from January this year is impacting provision requirements. Under the earlier standards, the CBUAE required a 25 per cent provision of 90 days past due, 50 per cent for 180 days past due and 100 per cent for 360 days past due. However, IFRS 9 does not differentiate between different buckets and depending upon probability of defaults (PDs) and loss given defaults (LGDs), upfront provision rate could vary from 40 per cent to 75 per cent.

“For [outstandings] 30 days past due, CBUAE does not require any specific provision and only 1.5 per cent general provision applies. However, under IFRS 9, it changes to Stage 2, which is equivalent [to the] watch list and our experience suggests close to 5 per cent provision [required] as opposed to 1.5 per cent,” said Cook.

IFRS implementation has drastically shortened the provisioning cycle with banks are required to recognised expected losses. That in itself creates challenges for lenders and borrowers because in every industry there are delays and it has been a normal practice in the market to pay late.

“The whole market has to become a lot tighter in the management of liquidity and that is an ongoing process in which the payment cycle has to become tighter. With this new reporting standard, extending of credit periods based on the circulation of post-dated cheques or massive discounting of cheques to create additional credit periods has become harder. People are beginning to understand the consequences of this and practices are changing,” Cook said.