x Abu Dhabi, UAEWednesday 24 January 2018

UAE banks' bad loan ratio may double

Analysts say the bad loans on the books of banks in the UAE could be as much as Dh110 billion, more than double the previous estimates.

UAE banks may be carrying as much as Dh110 billion (US$29.94bn) in bad loans, more than double the amount previously thought, analysts said yesterday. An estimated 9.5 per cent of loans on the books of Standard Chartered and 12.2 per cent of loans on the books of HSBC are believed to have gone sour, estimates based on the banks' financial statements for last year show.

This indicates that about 11 per cent of loans at UAE banks may be in default, said Saud Masud, an analyst at UBS in Dubai. "Our assumption is therefore that the average [of the two banks] may be viewed as the implicit NPL [non-performing loan] ratio for UAE banks - that is 10.9 per cent," Mr Masud said. Given that loans in the UAE total Dh1.02 trillion in January, Central Bank figures say, this would mean an estimated Dh110bn in loans have soured.

If consumers and companies are still suffering from the global downturn more of them could default, Mr Masud said, and the percentage of bad loans could rise even further. The new figures are sharply higher than the 3.3 per cent rate so far reported by UAE banks. The Central Bank has said it expected loan defaults to rise to 6.4 per cent of overall loans this year, up from about 4.5 per cent at the end of last year.

Standard & Poor's (S&P), the ratings agency, also estimated yesterday that bad loans may amount to about 10 per cent of all loans in the Gulf by the end of this year, when restructured loans are included. "The way we look at asset quality is we [include] renegotiated loans and loans that should have been reclassified [as being in default]," said Emmanuel Volland, the director of financial institutions ratings at S&P.

The discrepancy between the relatively small portion of bad loans reported so far and the much larger figures reported by HSBC and Standard Chartered - which have significant exposures to Dubai World, the government-owned group undergoing a $26bn debt restructuring - "may be subject to stricter and more conservative accounting practices relative to some UAE banks", Mr Masud said. Some banks, such as First Gulf Bank in Abu Dhabi, only report a loan as non-performing when it is more than 180 days overdue. This contrasts with international reporting standards, which require a loan to be declared bad when it is 90 days overdue.

Banks can also renegotiate loans under strictly defined circumstances. "We are seeing a significant increase in restructured loans in the last quarter, and expect that to increase in the next quarters," Mr Volland said. Three of the country's largest banks alone restructured more than Dh15bn in loans last year - about double their reported bad loans. But some of these loans may be "stressed" and likely to end in default.

"If you compare that with, say, Qatar or Saudi banks, the question is whether the [local] banks will still be able to compete," Mr Masud said. Another unknown is how banks will be compensated for loans to Dubai World. The conglomerate is negotiating the terms of a $26bn restructuring with creditors that may result in only partial repayment. Banks cannot set aside provisions against losses from Dubai World as long as the state-run conglomerate's accounts remain up to date and they continue to receive interest payments.

HSBC's UAE loan book of $13.9bn holds an estimated $1.7bn in non-performing loans, with a 12.2 per cent ratio. Standard Chartered's UAE loan book of $10bn contains an estimated $950 million in bad loans, resulting in an NPL ratio of 9.5 per cent. uharnischfeger@thenational.ae