x Abu Dhabi, UAESaturday 20 January 2018

Banks put more aside to cushion against bad debt

UAE lenders are setting aside money at a brisk rate to cushion themselves from bad loans.

UAE lenders are setting aside money at a brisk rate to cushion themselves from bad loans, according to figures released yesterday by the Central Bank. Overall provisioning, or the practice of retaining funds as protection against loan defaults that would otherwise have been booked as profits, grew by 11 per cent between May and last month, the data revealed. The rise, from Dh30.2 billion (US$8.2bn) to Dh33.5bn, was the quickest month-on-month increase in provisioning in the past year. Provisioning at the nation's banks has increased 50 per cent since last August.

Such a spike in provisioning is common during recessions, analysts said yesterday. With more people losing their jobs and more companies falling on to hard times financially, banks were more likely to be hit by defaults from customers who could not pay back their loans, they said. According to the figures, banks had provisioning last month of Dh23.9bn specifically for loan defaults, a 4.4 per cent rise from May. Banks also had Dh9.6bn in general provisions last month, a 31.5 per cent increase from May.

This rapid increase in general provisions - which cover the bank against future potential unknown losses - compared with those specifically for non-performing loans could mean that although banks are being vigilant about the possibility of defaults across their loan portfolios, non-performing loans are no longer growing at the same rate. Either way, analysts expect provisioning to put a significant dent in the second-quarter earnings of banks.

When it reported its results last week, the Commercial Bank of Dubai said it had set aside Dh75 million in provisions in the first half of this year, helping to reduce its profits by 11.3 per cent compared with the same period last year. "The suggestion is that there is a good chance provisions will be higher than expected in [the second quarter], with most of this relating to general provisions, suggesting that forward looking indicators may have taken a sharp dip in June," said Raj Madha, an analyst at EFG-Hermes in Dubai.

The rise in provisioning may also reflect preparations for write-downs of debts owed to the banks by two troubled Saudi conglomerates, the Saad Group and Ahmad Hamad Al Gosaibi and Brothers. Both firms are carrying out sweeping debt restructurings and are estimated to owe international and regional banks about $20bn. Several banks in the UAE, including Abu Dhabi Commercial Bank and Mashreqbank, are owed money by the groups, although they have said potential losses stemming from these loans were manageable.

"While we have assumed that the credit card portfolio has weakened during [the quarter], it seems quite likely that Al Gosaibi and Saad Group exposure has hit provisions earlier than we had expected," Mr Madha said. First Gulf Bank and Abu Dhabi Islamic Bank, both of which have exposure to one or both of the Saudi conglomerates according to documents obtained by The National, are expected to report second-quarter financial results this week.

Yesterday's Central Bank statistics also revealed that bank loans and advances rose 0.5 per cent to Dh1.01 trillion. Bank deposits dipped 1.1 per cent to Dh961.7bn. @Email:afitch@thenational.ae