UAE bank provisions for bad loans hit a record high in December.
Provisioning rose 7.5 per cent for the month compared with November to reach Dh44.3 billion (US$12.06bn), according to data from the Central Bank. Compared with December 2009, provisions were up more than 35 per cent.
"It's typical for the year-end that you get some sort of surprise, but this is a big increase," said Raj Madha, a Mena region analyst at Rasmala Investment Bank.
Analysts said the increase was due to new Central Bank regulations that require banks to classify bad loans as being in default - and make provisions accordingly - after 90 days rather than the previous 180 days.
The new policy is expected to bring the UAE's financial institutions into line with international standards on non-performing loans and provide a more realistic picture of banks' financial positions.
Banks are now expected to report bad loans from last year in accordance with the new regulation, and early signs show some are performing better than anticipated.
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First Gulf Bank, which recently reported that its non-performing loans were 3.7 per cent of gross loans at the end of last year, had been expected to post a figure of 4.3 per cent.
"It was better than expected," said Jaap Meijer, the head of the bank research team at Alembic HC Securities in Dubai.
Most banks have already announced their debt exposure to Dubai World but those figures were not reported as non-performing loans because the company will be restructured, analysts say.
"Banks still haven't got a very clear indication of how to do this," says Murad Ansari, the director of equities research at EFG-Hermes in Saudi Arabia.
"The bank's point of view is that because [Dubai World] is restructured now it should be part of performing loans. I don't think it should raise any fresh concerns because provisions have been taken in accordance with the revised terms and conditions with Dubai World."
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Some banks, however, have performed better than anticipated, even considering the new regulations. First Gulf Bank, which recently reported that its non-performing loans were 3.7 per cent of gross loans at the end of last year, had been expected to post a figure of 4.3 per cent. "It was better than expected," said Jaap Meijer, the head of the bank research team at Alembic HC Securities in Dubai.
The increase in problem loans across the UAE might also be due to a "year-end effect", said Mr Madha. Banks tended to "tidy up the books at the end of the year and clean up their reporting, and the Central Bank has a more thorough look and decides maybe the banks haven't been cautious enough through the year", he said.
In December, analysts also noted a sharp contraction in lending, which usually goes hand in hand with a fall in bank deposits.
But the National Bank of Abu Dhabi reported last week its deposits grew 6.5 per cent by the end of last December compared with the same month in 2009. Last month, Abu Dhabi Commercial Bank said its fourth-quarter customer deposits grew a full 23 per cent from the same period in 2009.
Overall, the banking industry had deposits drop 0.4 per cent between October and November, although deposits remained flat in December and were up 6.8 per cent overall from the same month a year earlier at Dh1.04 trillion.
"That's not particularly positive but that's held up surprisingly well considering the contraction in lending," said Mr Madha.