Banks are steeling themselves for a difficult few weeks, with changes in Central Bank regulations expected to expose the full extent of troubles with bad loans.
Across the region, lenders including Samba Financial Group, Al Rajhi Bank, Doha Bank and National Bank of Bahrain are expected to report earnings for the final three months of last year before the end of the week. UAE banks will soon follow, with the Abu Dhabi Commercial Bank (ADCB) and First Gulf Bank due to report full-year earnings on January 26, and National Bank of Abu Dhabi is expected to follow by February 1. Emirates NBD is due to report on February 10, although some banks could start to provide early earnings estimates from this week.
Sofia el Boury, a banking analyst at Shuaa Capital, said the results for the quarter would be likely to result in a great deal of adjustment for banks, as the true extent of their exposure to bad debts became apparent.
"It's maybe going to be a turning point for the banking sector in the UAE. At last, we'll have very strong regulatory adjustments coming through and a very accurate vision of asset quality," she said. However, some investment bankers are not convinced that the sector is out of the woods just yet.
"As a result of a lack of adequacy of provisioning in the region, and possibly globally, bank managements aren't clear on what their real underlying solvency issues are now and, more importantly, what they will be in December 2011," said Paul Reynolds, the managing director and head of advisory at the investment bank Rothschild Middle East.
"In 2011 there will still be a significant doubt in the minds of shareholders, regulators and bank management about whether or not current levels of provisioning really are adequate," he said.
"What we're observing in terms of bank lending behaviour seems to suggest that banks are not that confident about their solvency surplus, and how much new lending they can do." Among the other changes mandated by the Central Bank, bad loans must now be declared as such after 90 days rather than six months. Banks must set aside greater amounts for their exposure to the Saudi Arabian conglomerates Saad Group and Ahmad Hamad Algosaibi & Brothers, which are currently embroiled in legal disputes.
Banks must also increase general provisions to 1.5 per cent of risk-weighted assets, which will weigh on their profits for the full year.
Provisions for non-performing loans (NPLs) hit Dh41.2 billion (US$11.21bn) in November, a 28.75 per cent increase from a year before, according to data from the Central Bank. Total provisions across the banking sector were Dh55bn.
"UAE banks are well capitalised, but earnings momentum could suffer from high provisioning irrespective of whether or not NPLs peak out in 2011," said analysts from Credit Suisse in a recent report. "First Gulf Bank looks best positioned with excess capital of $4.1bn, while ADCB and Dubai Islamic Bank are not favourably positioned compared to peers, with excess capital of $1.3bn and $1.1bn, respectively," the report added. Mr Reynolds added that increased levels of default and restructuring in the UAE's private sector could lead to higher provisions this year. Al Jaber Group, Emarat, and Zabeel Investments have all recently begun discussions with creditors over restructuring.
"The question must be: to what extent are we adequately providing for the private sector portfolio?" Mr Reynolds said.