Lesson in diligence can teach banks to balance their accounts

Abu Dhabi: If UAE banks learned nothing else from 2009, they had to have taken a lesson in conducting due diligence.

Much like lenders everywhere else, local banks found out they had been lending money to people and companies who could not pay it back for various reasons. This meant despite reporting strong, and sometimes setting historical record quarterly operating revenues, provisions for bad loans would often bring their profits back below comparable 2008 figures by wide margins.

So what happens when the sector's provisions grow by more than 56 per cent in less than a year (December figures have not been released)? Someone has to take the blame. Hence it was the year the names Sa'ad and Algosaibi made it into the Gulf's financial vocabulary as primary villains.

Grace

Irrespective of the variance in earnings and financial health of the 52 banks operating in the country, they can find grace in ending 2009 as more stable institutions, despite continued tight lending and increase in non-performing loans (NPL). After the calamity of 2008, could one really ask for more?

"Things will get better, but it will take time," said Deepak Tolani, vice-president of equity research and banking at Al Mal Capital. "NPLs can be a lagging indicator. As we move forward I think the picture clears. But provisions are growing and will continue to grow until there is some level of comfort with NPLs."

With greater volatility in the sector came an increasing role for the UAE Central Bank. The bank has made available Dh120 billion for banks since the onset of the global financial crisis in late 2008 to combat tight liquidity and encourage lending at a time when everyone just wanted to hang on to their money to minimise chances of incurring further losses.

Numbers-wise, the Central Bank's liquidity injections, along with intervention to guarantee deposits, lower the rate at which banks lend money to each other and demanding greater disclosure seem to have worked.

Loans now make up 102 per cent of deposits compared with 110 per cent in January. The sector's capital adequacy ratio has registered 18 per cent at the end of the third quarter compared to 13 per cent at the end of the first. But perhaps most importantly, there is a sense of stability in the banking system compared to the insecurity and unpredictability that dominated the end of 2008.

Slow deposit

That's not to say the crisis is over. Banks still have to deal with billions of dirhams worth of real estate and construction projects put on hold or cancelled altogether, and a still growing number of defaulting borrowers, not to mention a slow deposit growth rate hampering their ability to lend.

In short, bankers call it deteriorating asset quality — a factor Cairo-based HC Securities says will continue to strain the loan books of UAE banks before it gets better.

"With economic conditions still proving to be challenging and given the time it takes past due loans to move into default category, we expect asset quality to further deteriorate across the board, for both retail and corporate, until mid-next year," HC Banking Analysts Janany Vamadeva and Engy El Dishish wrote in a recent research report.

Perhaps by then lessons learned will begin to translate into stronger loan books and a return to year-on-year profitability growth almost taken for granted before the onset of last year's crisis.