UAE banks have not set aside sufficient provisions to cover for potential losses in the property sector, experts warn. Failure to provide adequately for loan defaults helped trigger the spread of the subprime mortgage crisis in the US and led to numerous bank closures.
"We are still seeing low numbers here, basically around 2.5 per cent loan loss provisions to total loans," said Mardig Haladjian, who heads the GCC banking team for Moody's Investor Service, the ratings agency. "Given the deterioration that we have seen, and expect to see, particularly in exposures to property, one would expect provisions to have increased more aggressively." UAE bank loans total Dh1 trillion ($272.29 billion), according to Central Bank data. However, only Dh26.3bn has been set aside for non-performing loans, it said, and only Dh8.8bn for so-called general provisions, which includes funds earmarked for loans to the troubled Saudi conglomerates Saad and Ahmad Hamad Al Gosaibi Brothers.
The Central Bank could not be reached for comment. "Provisions are just too low compared to the total loans in the system," said Yazan Abdeen, fund manager at ING Investment Management. "They should come up to have higher provisions in the third and fourth quarters." Although loans to the property sector are capped at 20 per cent, many estimate they could easily account for one third of the loan book because individuals used personal loans to buy property.
Even a conservative estimate of a 20 per cent drop in property values, the estimated Dh300bn property loan book would have lost about Dh60bn of value, more than twice the provisions taken so far. The financial crisis has sent property prices spiralling across the country, with some estimating that prices in Dubai have fallen as much as 50 per cent from their highs by year-end. In addition to declining property values, there are growing concerns over unprecedented levels of corporate debt, restructuring experts warn.
"There is the "surprise factor" in private sector corporate delinquencies, which could be material," said Mr Haladjian. "There will be financial distress with corporates and family-owned businesses. This issue has been a bit overlooked in the public sphere," said Michael von Uffelen, director and restructuring specialist at Arqaam Capital. In recent months, the public debate has largely focused on sovereign debt, particularly Dubai's which stands at an estimated $85bn including that of government-owned entities.
"For the sovereigns, the worst is over, but the worst is yet to hit the private corporate sector," an investment banker told a recent restructuring conference in Dubai. "Banks will have to do the [margin] calls and ask the corporates to do voluntary restructuring." According to some analysts, the percentage of non-performing loans could rise to 5-10 per cent, notably in credit cards and unsecured loans. The failure rate shot up to 5.1 per cent in the US in 2007.
"We could easily see non-performing loans quadruple from their pre-crisis levels," said Mr Haladjian. Non-performing loans are less than 2 per cent of the total in the UAE. Emirates NBD, the largest bank by assets, said it expected its non-performing loans to peak at 2.5 per cent next year. Until last year, non-performing loans used to be around 1 per cent for most UAE banks, although Dubai Islamic Bank's rate was 4.1 per cent in the past year.
While banks can theoretically repossess properties or assets of defaulted companies, few expect this to happen on a large scale in the UAE. "Sometimes it is the only way to get you money back by taking direct control of the assets. But banks are very reticent to take possession, it is costly and very time consuming," said Mr von Uffelen. So far, there have only been a few such cases, including the high-profile repossession of the Plantation Equestrian and Polo Club by Dubai Islamic Bank. In addition, government ownership of UAE banks makes banks more reluctant to aggressively take over collateral. The legal framework for repossessions is untested.
"Banks will be hesitant to do margin calls [as long as they are] under the government," said Mr Abdeen. email@example.com