The country's three biggest banks have renegotiated more than Dh15 billion (US$4.08bn) in loans, raising concern that the balance sheets of local lenders may be weaker than previously believed. This comes after a year in which UAE banks tripled provisions for bad loans as customers defaulted and corporate borrowers were unable to pay back loans taken out during the boom years.
The dramatic rise in renegotiated loans has triggered worries that the practice, which is known as evergreening, may mask the full extent of lending that could turn sour. Analysts said some banks now ran the risk of not being repaid on borrowing that would be better classified as non-performing. "There are some huge numbers showing up," said Deepak Tolani, an analyst at Al Mal Capital in Dubai. "These loans are still stressed, even if the customer is servicing them right now. They could come back and bite you. They are weakened loans."
National Bank of Abu Dhabi renegotiated Dh3.2bn of loans last year, while no loans were renegotiated in 2008, according to its consolidated financial statement. That is twice the volume of its loans classified as non-performing for the year. First Gulf Bank (FGB), the country's largest lender by market capitalisation, has seen its renegotiated loans triple to Dh2.5bn in the past year, according to the bank's consolidated financial statement.
Emirates NBD, the country's largest bank by assets, has reported that it doubled the value of its renegotiated corporate loans to Dh7.8bn from 2008 to last year, bringing its overall renegotiated loans to about Dh10bn. The bank will release the full figures once the Central Bank reviews its books. The large amount of renegotiated loans reflects the state of the economy, said Andre Sayegh, the chief executive of FGB. "It is like a domino," he said, adding it was important that "the size of the issue is known".
The head of investor relations at a large bank, who did not want to be named, said: "The rules are definitely not clear cut, there is always an element of wording and some wiggling room around these things. Management judgement can always override things." Strictly speaking, banks can renegotiate loans - instead of declaring a default - only if they have sufficient reason to believe the client can ultimately pay. "Renegotiating is a standard part of looking at a loan. You must have a fairly robust definition of what it is; you cannot take a three-year loan and transform it to one bullet payment in 10 years," said Sanjay Uppal, the chief financial officer at Emirates NBD.
Renegotiation typically picks up when the economy slows, leaving companies with less cash flow and individuals with reduced earnings or no jobs at all. "A renegotiated loan must reflect changes in the underlying cash flow," said Mr Uppal. The financial crisis has drained the UAE of fresh funds and left many companies scrambling for cash. Lower salaries and scrapped bonuses have also hurt disposable income for individuals.
"You must make sure that anything classified as renegotiating a loan is well understood as a real renegotiation between yourself, your counter-party and approved by the auditor," said Mr Uppal. Asked if all banks complied with such strict definitions, he said: "It is difficult for me to comment." The head of investor relations said: "Renegotiating loans is all about matching the underlying cash flow with the terms of the loan. It should not be about delaying bad news."
Although International Financial Reporting Standards require banks to reveal their exposure, management and auditors have some leeway in presenting that information to investors. Abu Dhabi Commercial Bank, the capital's second-largest lender that has a Dh9bn exposure to Dubai World, does not reveal its renegotiated loans, maintaining it is "not a requirement under the accounting standards". Renegotiation often takes place when companies see their turnover decline. For example, a bank finances a company's investments based on its inventory turning over every six to nine months. Once that turnover slows to 15 months, the bank revises the terms of the loan to reflect the company's new cash flow.
"The bank is still happy with the relationship and the company is still generating cash flow," said the head of investor relations. @Email:firstname.lastname@example.org