Banks brace for increased defaults

Bankers expect loan defaults to rise in the next couple of months as uncertainty continues over the potential number of "skips" - people fleeing the country without paying their debts. "There is always a marginal increase in delinquencies ahead of the summer. But this time there is clearly the worry that job losses will result in higher credit losses because people may not even come back," said Sanjoy Sen, Citibank's consumer bank head in the Gulf. The UAE's large transient population, and laws that oblige those without work to leave the country, together with a lack of historical reference points, make it hard for banks to judge their ability to recover bad loans from departing expatriates. Youssef Nasr, the chief executive at HSBC Middle East said recently: "We are in unchartered territory. The real hot test will be the consumer credit portfolio when the individual is destitute. Usually a skip list assumes that people will stay and banks have the ability to continue collecting." Now that schools have closed for the summer, departures are expected to speed up. However, it remains unclear just how large the exodus of unemployed expatriates will be. Recent studies by banks and consultancies say the population of Dubai could shrink by a fifth this year. Traditionally, UAE banks have seen far fewer customers default on loans than in both its more developed peers, notably the US, and in emerging markets. Last year, UAE banks had average non-performing loans of 1.3 per cent, only slightly higher than Qatar and Saudi Arabia, but considerably lower than the US, which peaked at 5 per cent in 2007. "There is no denying that there has been a rise in delinquencies and lots of banks are seeing increasing credit losses," Mr Sen said. "But we are trying to work out mutual agreements. The objective is to protect banks' interest and work with customers, to extend their timelines and behaviours." Generally, banks should declare a loan "non-performing" after 90 days, but many prefer to stretch that out, most often by negotiating with customers. As a result, the full impact of non-performing loans may not be seen until banks publish their full-year earnings in January. "I suspect most banks will make their utmost efforts to keep the loans in the performing bucket," said Giyas Gokkent, the chief economist at the National Bank of Abu Dhabi. "There will be an uptick but we have no clarity where it will go." All banks have already raised their provisions, in turn making credit more expensive. The consensus among bankers is that the rise in non-performing loans will cut into UAE banks' profits, but there will be no threat to the system. Last week, Emirates NBD repeated its earlier warning that rising non-performing loans may eat into its earnings. In the first quarter, its loan defaults stood at 1.2 per cent, up marginally from 1 per cent last year. This is better than the Dubai Islamic Bank , which saw its non-performing loans rise to 4.1 per cent last year. Things looks grimmer for banks when it comes to bad debts on credit cards. Outstanding credit card payments have risen fourfold in the past four years, after an economic boom fuelled by high oil prices, and are estimated to stand at Dh20 billion (US$5.45bn) now. The rapid rise of unsecured debts and the absence of a credit bureau means that while such loans are prolific, their quality is hard to judge. Raj Madha, a banking analyst at EFG-Hermes, said that credit card and other unsecured loans could well see default rates of up to 5 to 10 per cent. uharnischfeger@thenational.ae