Dubai: The UAE's banking sector has managed to keep the non-performing loans at relatively low level despite the impact of the global financial crisis affecting asset growth and profitability, according to industry analysts.
"The UAE currently has a lower non-performing loan (NPL) ratio at 1.3 per cent of loans than its emerging market peers at 3.5 per cent and adequate provisioning (coverage ratio) of 120 per cent, higher than emerging market peers," said Mohammad Hawa, a research analyst with Credit Susisse.
Historically banking-sector crises have been significantly characterised by defaulting sovereign debt (a highly levered public sector running a fiscal deficit), and/or by a currency devaluation. On these parameters analysts believe that the risk of the UAE's NPLs reaching very high levels is low, as the UAE has a high fiscal surplus at 13 per cent of GDP and low public debt at 10 per cent of GDP and the high current account surplus of about 20 per cent of GDP.
Earlier this year international rating agencies such as Moody's, Fitch and Standard & Poors had downgraded the ratings of a number of UAE banks due to mounting pressure on profitability as a result of falling asset prices, high exposure to real estate sector and thinning margins due to high funding costs.
While the UAE banks continue to face high cost of funds in the international market and are still sitting on stretched balance sheets with average loans to deposit ratio of 115 per cent, analysts believe that the overall liquidity situation has improved substantially since the beginning of the year.
In response to the liquidity squeeze that began in the third quarter of 2008, the Central Bank of the UAE responded by guaranteeing deposits for three years and provided a Dh50 billion liquidity support. The Ministry of Finance injected Dh70 billion of deposits, which it later agreed to be converted into subordinated debt, and Abu Dhabi injected Dh16 billion of Tier 1 capital into its five largest banks.
These steps have played a significant role in easing liquidity pressures. The three-month interbank rate (EIBOR) is currently down to 2.5 per cent from highs of 4.8 per cent in October 2008.
"With historically strong fundamentals we do believe the sector is poised for a rebound once government support covers short term liquidity shortage, banks slow down on lending and get their utilisation rates to normal levels, huge provisions are built up getting toxic assets out of the system," said Cairo based HC Securities in a recent report.
With a loan/deposit ratio of 115 per cent and Dh20.9 billion of maturing medium term notes in 2009-10, analysts expect short to medium tem liquidity to be the most important concern for the UAE's banking sector.
Credit Suisse analysts estimate a short term funding deficit of Dh52.3 billion for the UAE banks. However, analysts are optimistic about further government intervention to bridge this gap.
"Contrary to prevailing fears, we believe public-sector finances in the UAE are in relatively good shape and that the government's ability and willingness to help should prevent significant balance sheet deleveraging and very high non performing loan levels," Credit Suisse said in a recent report.