x Abu Dhabi, UAETuesday 23 January 2018

Lenders face more provisions

The financial pain for banks is likely to continue as the tide of bad loans are forecast to rise further this year.

Banks face a further rise in non-performing loans (NPLs) this year, a senior Central Bank official says.

A build-up of bad loans has been blamed in part for sluggish lending as banks remain cautious about exposing themselves to fresh risk.

NPLs "should go up because of the global economic situation", said Saeed al Hamiz, the senior executive director of the Central Bank's banking supervision and examination department. "If it didn't continue, then our figures are mistaken."

NPLs were likely to stop rising next year, but whether they would then drop immediately was unclear, Mr al Hamiz said.

Total NPL provisions by banks shot up nearly 36 per cent to Dh44.3 billion (US$12.06bn) last year compared with Dh32.6bn in 2009, according to Central Bank data. Provisions for bad loans hit a record high in December.

Analysts expect the tide of bad consumer debt, which rose higher during the financial crisis, to ebb this year.

Banks have already felt significant pain from corporate defaults. Dubai World, a government conglomerate that owns the global ports operator DP World, last September reached an agreement with bank creditors to restructure $24.9bn of debt into new loans maturing in five and eight years.

Lenders' balance sheets were also tested by exposure to two Saudi conglomerates, the Saad Group and Ahmad Hamad Algosaibi and Brothers, both of which first defaulted on financial obligations in 2009.

But the need for lenders to provide against the risk of a further rise in corporate defaults is likely to mean the strain on banks is not yet over.

"Banks are beginning to say they have a grasp on the situation, but there has been a resurgence in corporate NPLs," said Raj Madha, an analyst at Rasmala Investment Bank.

Recent Central Bank regulations require banks to classify bad loans as being in default - and make provisions accordingly - after 90 days rather than the previous 180 days.

The new policy is expected to bring the UAE's financial institutions into line with international standards on non-performing loans and provide a more realistic picture of banks' financial positions.