Banks are expected to be hit by a rise in funding costs and soured corporate loans this year as they prepare to publish their final quarterly figures for last year. A debt standstill at Dubai World, the Government-owned conglomerate that is seeking to restructure as much as US$22 billion (Dh80.8bn) in loans, could also deprive local creditor banks of income from interest, analysts warned.
Liquidity concerns are again expected to dominate banks' agendas as funding costs become more expensive and worries over non-performing loans shift from personal lending to large corporate debts. Moody's Investors Service, the ratings agency, has warned that the Dubai World restructuring may again force banks to focus on managing their liquidity rather than lending. The renewed difficulty in tapping into capital markets could further impede their medium-term growth.
More than 90 creditors are in talks with Dubai World to reach an agreement on a formal debt standstill for the conglomerate, which has almost $60bn of total liabilities. "A standstill agreement would affect profitability because banks will have a certain amount of loans on their books for which they would not receive any interest payments," said John Tofarides, a banking analyst at Moody's. The ratings agency last month placed Abu Dhabi Commercial Bank (ADCB), Commercial Bank of Dubai and Dubai Bank on ratings watch after downgrading Emirates NBD, Mashreqbank and Dubai Islamic Bank "to reflect the ongoing deterioration in Dubai's economy".
Banks will also have to continue setting aside provisions for bad loans, analysts say. "Non-performing loans still need to work their way through the digestive tract as a large number of loans to the construction and real estate sector will need to be restructured and renegotiated," said Deepak Tolani, a banking analyst at Al Mal Capital. Standard & Poor's also warned of "fears of further balance-sheet impairments" in a recent report.
More loan impairments could also force some banks to increase their capital this year. A recent study by Citibank says ADCB's non-performing loan ratio could reach 11.7 per cent if the bank had to reclassify all of its loans to Dubai World. This would mean the bank would have to raise new capital because its current capital provides a buffer for only 7.4 per cent in bad loans. The funding crisis will also make it more expensive to raise funds in the market.
"You will see banks continue to review their risk appetite," said Michael Miebach, the managing director for the MENA region at Barclays' retail and corporate business. "People will see a rise in credit risks and borrowing will become more expensive." Sultan al Suwaidi, the Central Bank Governor, said in Sharjah yesterday that he expected to see more provisions set aside. Analysts say the focus on bad loan exposure among banks is also now shifting towards the commercial and property sectors.
"Until a few months ago everybody was worried about personal loans going bad," Mr Tolani said. "But banks can also ratchet back new lending, loans can be renegotiated and salaries can be locked in. By contrast, now you have to be worried about the big-ticket items in the corporate sector." ADCB, which has already had to set aside large provisions from its exposure to the troubled Saad and Al Gosaibi groups in Saudi Arabia, may report a Dh287 million loss for the fourth quarter, says EFG-Hermes, Egypt's largest investment bank.
Shuaa Capital expects ADCB to lose Dh88m, while Al Mal Capital predicts a profit of Dh33m in the fourth quarter. National Bank of Abu Dhabi may be one of the few lenders to report an improvement in its full-year performance for last year compared with 2008. EFG-Hermes expects the bank to report a fourth-quarter net profit of Dh759m, while Al Mal Capital estimates Dh873m. NBAD, which receives about 60 per cent of its deposits from the Government, is one of the banks profiting most directly from government spending, along with First Gulf Bank.
Emirates NBD, the country's largest lender by assets, may report a fourth-quarter net profit of Dh656m, Al Mal Capital says, while HC Securities estimates it at Dh676m. @Email:email@example.com