Bad loans are expected to be a drag on earnings in the third quarter for the UAE's banks, a sector widely viewed as a bellwether for the country's recovery from the global financial crisis.
While analysts expect better third-quarter profits at many of the country's banks, including Abu Dhabi Commercial Bank and National Bank of Abu Dhabi, they foresee declines for some of the biggest lenders, including Emirates NBD and First Gulf Bank. Emirates NBD, the biggest bank in the UAE, is expected to post a profit of about Dh804.3 million (US$238.2m) for the quarter, down from about Dh1 billion last year. Shuaa Capital in Dubai projects a 14.7 per cent increase in profit for the four banks it covers, while EFG-Hermes is projecting a 1.5 per cent overall decline in profits for the seven banks it covers.
"To ensure banks' levels of return, growth in lending in the fourth quarter is essential," said Sofia el Boury, an analyst at Shuaa. "This has to be combined with improvement in liquidity, control of funding costs and a slowdown in asset quality deterioration." Bad loans remain a central source of uncertainty. Banks are expected to book heavy provisions, or profits set aside as a buffer against bad loans, during the quarter to account for Dubai World's debt restructuring deal.
Dubai World agreed last month with almost all of its bank creditors to restructure $24.9bn of debt, and banks that lent to the conglomerate will have to take write-downs on their exposures. Shuaa is projecting the banks it covers to book Dh1.2bn in provisions for the third quarter, but Ms el Boury said the damage would not be huge. Banks had a total of Dh37.2bn set aside as provisions at the end of August, according to Central Bank figures, up from Dh26.3bn at the same point last year. But the rate of increase in provisioning has tapered off in recent months.
"We are expecting a maximum of Dh3bn in the second half of 2010 to be taken by UAE banks if they decide to provision against their exposure to Dubai World," Ms el Boury said.