x Abu Dhabi, UAE Friday 21 July 2017

NBAD chief upbeat on Dubai World exposure

Michael Tomalin is confident about loans to subsidiaries, but hoped banks would learn lessons from the debt crisis.

Michael Tomalin is confident about loans to subsidiaries.
Michael Tomalin is confident about loans to subsidiaries.

The chief executive of National Bank of Abu Dhabi (NBAD) expects the lender's US$225 million (Dh826.4m) exposure to two property units of Dubai World to be resolved this quarter. But Michael Tomalin said he hoped banks would learn lessons from the debt crisis. "We are in two deals; Nakheel, which is being sorted out, and Limitless, which is in the process of being sorted out," Mr Tomalin said. "All these issues should be resolved in this quarter."

The two property developers are part of the parent company Dubai World, which shocked world markets in November last year when it asked for a six-month delay in repaying its debt terms. NBAD is one of the few lenders in the UAE to have no direct exposure to Dubai World, which is engaged in a $23.5 billion debt rescheduling with its creditors. But before the global financial crisis, the bank made general corporate loans amounting to $100m to Nakheel and $125m to Limitless.

Part of its exposure to Nakheel has already been resolved after the developer repaid its $3.52bn sukuk on time in December last year. NBAD is still unclear how much it will have to write down from the restructuring process. "As far as Nakheel is concerned it's a delay in the payment terms being offered, which we think is fine," Mr Tomalin said. "The situation with Limitless is less clear. We don't know what the upshot will be as you have to do careful analysis of the assets ? to see what the value is there."

As a major lender, NBAD sits on the creditors' co-ordinating committee of Limitless, which last month was put under the management control of Nakheel in the latest restructuring shake-up. "I'd like to think people would learn lessons from [the Dubai World situation]," said Mr Tomalin. "The main lesson is that one should lend against cashflow, this is not just in Dubai's case but generally. A lot of bankers tended to lend against security, which sometimes have much less value. You need to lend against projects or deals or investments that produce cashflow."

Equally, the age-old practice of name lending, whereby a bank would extend a loan to a company based on their reputation rather than on their balance sheet, is another policy Mr Tomalin believes banks will try to steer clear of in future. The shortfall of this strategy was laid bare after both Dubai World's debt problems and the multibillion-dollar defaults on debt obligations by the family-owned Saad and Al Gosaibi conglomerates last year. Gulf banks were estimated to have a $10bn exposure to the Saudi pair.

"The problem if every bank is name lending and you are not is that it puts you in an awkward position," Mr Tomalin said. "Whereas now people will say they don't want to do it, so it should make it easier to enforce more vigorous lending underwriting standards across the industry." Years of easy credit conditions led to cash being poured into the region's property market and an increase in prices. The global downturn led to a collapse in property values and banks tightening lending conditions.

With lenders still nervous about extending finance, credit growth has still not recovered to levels needed to help create jobs and boost economic expansion. Although the liquidity position of UAE banks is improving, the ratio of customer deposits to loans is about the same or less, limiting the amount of spare cash banks have to lend, said Mr Tomalin. "It will be modest credit growth, in the order of high single figures, across the year, which is probably not enough for an economy that wants to grow quite fast," he said.

"We need a view as to how fast we want credit to grow in the country and it needs to be alongside the overall plans for the economy as a whole." NBAD last month posted a second-quarter net profit of Dh1bn, a rise of 10.4 per cent from the same period last year, as lending income increased at the country's second-largest bank. tarnold@thenational.ae