Money set aside to cover bad debts is dwindling at the UAE's biggest lenders as the global financial crisis fades from view and top bankers feel more optimistic about the strength of the local economy.
Bank stocks have rallied sharply this year as expectations grow that numbers of problem loans peaked last year.
In Dubai, the four biggest banks reported an 18.1 per cent drop in provisions and writedowns of bad debts to Dh6.3 billion (US$1.72bn) during the year, according to their financial statements.
In Abu Dhabi, money put into reserves to cover bad debts by the capital's five biggest banks declined by around 10 per cent, falling most sharply for Abu Dhabi Commercial Bank and National Bank of Abu Dhabi, the two biggest lenders.
The UAE economy showed firm signs of recovery last year amid record tourist arrivals, a resurgence in global trade and an improving property market.
Despite that, Central Bank data shows that the amount of capital set aside to cover bad debts across the financial system rose by 20 per cent to Dh66.4bn during the first 11 months of the year.
Data for December is yet to be released.
But numbers of defaulting debtors are expected to have stabilised over the course of the year, allowing banks to approach their year-end financial reporting with a greater degree of certainty about how much they need to set aside, said Khalid Howladar, a financial analyst at Moody's Investors Service, the credit rating agency.
Bad debts "peaked in 2012 and will fall marginally over the course of 2013 so the cumulative problem loan total across the system is broadly known," he said. "This additional certainty allows banks to plan their provisioning levels and spread out the charges more moderately rather than having to conservatively provision for unknown and growing risks as per recent years."
However, smaller banks that have tried to capitalise on the recent weakness of big lenders bucked the trend, with United Arab Bank, National Bank of Fujairah and Finance House reporting sharply higher provisions for bad debts as the size of their loan books increase.
Bank stocks are soaring so far this year, spurred by promises of higher dividend payments as banks feel more confident and return cash to shareholders. The Dubai Financial Market's banking index is up 14.6 per cent, while its Abu Dhabi counterpart has gained 15.5 per cent.
While high dividend payouts were attracting investors to bank stocks, the outlook for big lenders was also increasing, said Shabbir Malik, a banking analyst at EFG Hermes.
"Most banks paid out quite healthy dividends, some of them more than 50 per cent of earnings," he said.
"This shows that they feel more comfortable with capitalisation levels and the risks of provisioning are coming down."