The United Arab Emirates may be coming out a winner of the Middle Eastern unrest as it welcomes bankers and investors burnt in Bahrain and north Africa.
But lingering weakness in its banking sector is a reminder that the Gulf state still nurses its own wounds from its 2008-9 financial and real estate crisis.
Local banks’ liquidity and capital levels are gradually improving, as are levels of provisioning for bad loans, analysts say.
Nonetheless, UAE banks First Gulf Bank, Emirates NBD and the National Bank of Abu Dhabi have all recently reported first-quarter results that missed expectations, in part due to greater than expected provisions for loan losses.
For the majority of the country’s banks, their exposure to bad debts in real estate is compounded by loan growth that, although gradually recovering, is restrained by the still-soft economy and banks’ tightening lending standards.
Loan growth in 2010 was 4.4 per cent and is expected to remain the “softest” in the region, says Jaap Meijer, a banking analyst with Alembic HC.
According to Raj Madha, a banking analyst with Rasmala Investment Bank: “We [the UAE] obviously have a number of troubled areas, particularly real estate, that haven’t worked their way out, and real estate is a very big part of the bank credit market.”
Slow loan growth is not all bad. Emirates NBD saw loans shrink 1 per cent quarter on quarter – helping it get its loan-to-deposit ratio down to a slightly more sensible 92 per cent from 99 per cent in December.
And the high levels of non-performing loans suggest the underwriting standards of the boom years may have fuelled growth, but not necessarily all that sustainably. Analysts say that writing down bad loans and deleveraging could take years and will keep banks growing at a pace slightly slower than that of the rest of the economy.
But beyond that – when banks try to shift from recovery back to growth – they will need to see lending grow.
For now, what the market does see is increased public spending.
“Oil prices are through the roof and that will find it’s way through the economy,” said Mr Meijer at Alembic HC.
Mr Meijer predicts 6 per cent loan growth at UAE banks for 2011, weighted towards Abu Dhabi banks with greater exposure to the emirate’s ambitious plans to diversify away from reliance on oil and gas income.
Yet from that perspective, the near-term prospects for UAE banks pale in comparison to their Qatari counterparts.
There, Mr Meijer expects 19 per cent loan growth as Doha ramps up for the World Cup – a public works project that, unlike many in the region, cannot be cancelled or downsized.
By Sarah Mishkin
© Copyright The Financial Times Ltd 2011.