Banks are bracing for an escalation in bad loans in the new year as defaults spread throughout the financial system and attention shifts from retail to corporate customers in the wake of the Dubai World debt restructuring. Non-performing loans were once considered a minor issue that would work its way through the system in a matter of months, but most analysts now expect the volume of bad loans at banks to crest next year before gradually receding as they are written off.
"We expect non-performing loans to peak by mid-next year," said Janany Vamadeva, a banking analyst at HC Securities in Dubai. "A non-performing loan takes six months to be reflected in the books, even after things improve. Even in corporate loans, asset quality is deteriorating." Banks' loan books have been buffeted from numerous directions. Stress recently cropped up in corporate loans after bankers began discussions this month over a US$22 billion (Dh80.8bn) restructuring at Dubai World, a Dubai Government-owned conglomerate that owes local banks billions of dollars. Defaults on corporate loans this summer at two Saudi conglomerates, the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, also have yet to work their way through the system, bankers say. And concerns remain about the status of loans to companies operating in Dubai's embattled property sector after prices declined this year by an estimated 50 per cent in some places.
"I think we will see non-performing loans rising and reserves rising," said Deepak Tolani, a banking analyst at Al Mal Capital in Dubai. "We're not out of the woods yet. Everybody seems to think loan growth will come back, but it's going to take time for this to get straightened out." Adding to the systemic stresses, consumer loans have been problematic throughout this year. The trouble started with a spike in defaults on credit cards and car loans caused by heavily indebted people fleeing the country and leaving their debts behind - what bankers refer to as "skips". A rise in missed payments, late payments and defaults quickly spread to other consumer debt, including personal loans and, later, mortgages.
"At the beginning of 2009, they said the number one thing they were worried about was skips," a banking analyst in Dubai said. "Now I think the number one thing is corporate provisioning." A banker in Dubai estimated that about 40 per cent of unsecured-loan provisioning - the practice of setting aside profits to account for bad loans - in the early part of this year could be traced to skips, although that phenomenon had worked its way through the system by the middle of the year. Provisioning at local banks nevertheless remains high. Central Bank figures showed provisions rose to Dh32bn last month, an increase of more than 10 per cent from October.
The problems with loans this year have led in part to reductions in staff at banks as they looked to control costs and keep their expense-to-revenue ratios in check. HSBC this summer said it had laid off 90 employees in the UAE, although a source at the bank said several rounds of redundancies had led to more than 200 job losses. Mashreq, one of Dubai's largest banks, has reduced its workforce by about 20 per cent this year, mostly through attrition, a source at the bank said.
This year's troubles have also led to increased concern about the quality of banks' assets, which are composed almost entirely of loans. Moody's Investors Service, one of the big three international credit ratings agencies, cited concerns about asset quality as a factor in its decision yesterday to downgrade the rating of Abu Dhabi Commercial Bank (ADCB) to "A1" from "AA3". ADCB's asset quality "continued to deteriorate in 2009, given in particular its high loan concentrations to defaulting Saudi corporates, and is now further challenged in light of Dubai World's pending restructuring", said John Tofarides, a Moody's analyst in Dubai.
The bank's "standalone financial strength has weakened as a result of the rising pace of loan delinquencies and impairments of investments", he said, adding that his firm expected "the already weakening operating environment in Dubai and Dubai World's recent restructuring request to continue to weigh on the bank's loan quality and likely profitability in the foreseeable future." @Email:email@example.com