x Abu Dhabi, UAEWednesday 24 January 2018

Moody's issues loan warning on UAE's banks

Unpaid loans by big UAE companies are a much bigger problem for the Emirates' financial sector than banks are reporting, the ratings agency Moody's has warned.

Banks in the UAE are significantly under-reporting the impact of US$45.9 billion (Dh168.59bn) of problem loans from big corporations, which may have allowed some lenders to report higher profits, a new report from Moody's Investors Service has warned.

A second round of restructurings of previously renegotiated debts - or possibly defaults - could also be on the way in the second half of this year, with bad debts not expected to stabilise until the middle of next year, the report said.

But tracking banks' exposure to Dubai World's $24.9bn in restructured debts, Moody's has identified three divergent accounting policies at banks, which have led to some banks reporting declines in their levels of bad debts and others reporting higher profits.

"Many banks in the UAE do not include restructured loans as part of their financial reporting, which reduces transparency around these prominent and potentially problematic future exposures, thereby diminishing the ability to track such exposure and make independent judgement of banks' asset quality," the report said.

Using a consistent method of accounting for bad debts would increase the level of problem loans to as much as 10.4 per cent of system-wide loans last year, compared with a rate of 9.1 per cent as reported by banks that year.

Moody's previously said it expected bad debts to peak at about 12 to 13 per cent, a projection that is not affected by its latest report.

After a decade of easy lending to corporations that left many significantly overleveraged, the UAE's banks have been crippled since the onset of the global financial crisis by the costs of setting aside money to cover bad debts.

It had been hoped that this year would mark a turnaround for local banks. But the euro-zone crisis has revealed some restructurings to have been overly ambitious - notably at Kuwait's Global Investment House, which has renegotiated its debts twice since 2008.

Moody's rival credit ratings agency Standard & Poor's also warned this month that the restructuring of Arabian Gulf companies' previously renegotiated debt facilities was one of the major risks for regional banks. Moody's has identified $16.6bn of bad debts currently being restructured in the UAE - accounting for 15 to 25 per cent of the banking system's total loans - with a total of $29.3bn already renegotiated.

Moody's declined to disclose the banks that have reported higher profits as a result of their accounting methodology.


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