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Despite loan growth and progress in putting the burden of past defaults behind them, the outlook is a mixed bag for the UAE's large lenders, including National Bank of Abu Dhabi
Despite loan growth and progress in putting the burden of past defaults behind them, the outlook is a mixed bag for the UAE's large lenders, including National Bank of Abu Dhabi

Consolidation comes first in the UAE

Loan growth and bad loans are the key words as the banking sector continues on the road to recovery. For now, damage limitation will suffice, with setbacks kept in check and better times ahead.

Loan growth and bad loans are the key words as the banking sector continues on the road to recovery. For now, damage limitation will suffice, with setbacks kept in check and better times ahead.

Banks in the UAE face another tough year, despite faster loan growth and progress in putting the pain of past defaults behind them.

Only one of the country's big banks, National Bank of Abu Dhabi (NBAD), has reported its first-quarter results so far. Last week, the lender revealed a 10 per cent decline in profits compared with the same period last year.

The outlook is a mixed bag for the rest of the country's large lenders, which include Emirates NBD, First Gulf Bank and Abu Dhabi Commercial Bank. Analysts say that in all cases, two themes will dominate earnings this year: loan growth and bad loans.

"What we are looking at now is growth in lending, which is really the main topic because it has been very weak over the past quarters," said Sofia el Boury, a banking analyst at Shuaa Capital in Dubai. "Given that there are signs that liquidity has improved since the fourth quarter, we're hoping this will be channelled toward increased lending."

NBAD, which met analysts' expectations with its quarterly profit decline, reported a 4.7 per cent rise in the value of its loans compared with the first quarter of last year. But analysts cautioned that rate of growth would not necessarily be repeated by other big banks. They also warned that banks were unlikely to return to the double-digit loan growth rates that preceded the financial crisis of 2008.

"One of the key things is whether we see any acceleration in loan growth [across the UAE's banks]," said Raj Madha, an analyst at Rasmala Investment Bank in Dubai. "It's been continuously deferred. We're not really expecting to see it in first-quarter results, though it would be welcome. The main issue is whether we see an acceleration in the second quarter."

Jaap Meijer, a banking analyst at Alembic HC Securities in Dubai, said the banking system was already experiencing "an improvement" in loan growth, a crucial part of lenders' health. But he said the pick-up was concentrated in Abu Dhabi and had not yet fully spread to the private sector. Much of the growth, he said, was coming as a result of massive spending on government projects.

At the same time, new Central Bank regulations that put constraints on personal loans are expected to go into effect this summer, potentially dampening lending. Ms el Boury said it was not yet clear how banks would respond to the regulations, but the impact could be significant given that about 20 per cent of UAE bank loans went to retail customers.

"It's going to have an impact on how banks treat retail lending, but I'm not sure if it's going to limit their growth," she said.

Yet while loan growth is important because it gauges banks' willingness and ability to lend, analysts have been watching bad loans even more closely. During the past two years, banks have been hit hard by the financial crisis, followed by major restructuring of loans by Dubai corporations. Dubai World, a conglomerate owned by the Government, recently reached a deal with banks to reschedule the payment of US$24.9 billion (Dh91.46bn) in loans.

Mr Meijer said that while banks had spent months building up their reserves to contend with bad loans, more of the same was on the cards because of continuing stress in the property market and Dubai's debt problems. Property prices in Dubai have fallen by as much as half in some areas since the market peaked in 2008.

"Part of the provisioning is behind us, but there is still a real estate overhang," Mr Meijer said. "We think that might be causing a problem that is going to take a while to absorb."

For those reasons, analysts say they do not see a full return to health for the banking sector until at least next year. Mr Madha said the trend this year was a gradual "stabilisation" or "normalisation", rather than a rebound.

"We are looking for a lack of negative shocks this quarter," Mr Madha said. "If we have a modest worsening of non-performing loans, that's not a big bad thing. We'll still see elevated provisions in 2011 and 2012."

Provisions for non-performing loans, or money set aside as a buffer against defaults, rose to Dh45.8bn at the end of February for the UAE's banks as a whole, according to Central Bank data. Provisions have more than doubled since the end of 2008, and continued to rise last year.

 

afitch@thenational.ae

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