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U.A.E. Bank Provisions Surge, May Hamper Earnings: Arab Credit

U.A.E. Bank Provisions Surge, May Hamper Earnings
Builders work on the construction of a road near Dubai World's The Gardens development in Dubai, United Arab Emirates. Banks set aside about $500 million to cover losses from Dubai World’s restructured loans, the International Monetary Fund said in May. Photographer: Gabriela Maj/Bloomberg

Provisions taken by banks in the United Arab Emirates for non-performing loans increased to the highest level in more than a year and may damp earnings for the country’s lenders in the third quarter.

Provisions for non-performing loans rose 11 percent in the first eight months of 2011 to 49.2 billion dirhams ($13.4 billion) in August, the highest since at least April 2010 when Bloomberg began tracking U.A.E. banking data.

“Profits will be affected because specific provisions in the third quarter of 2011 are likely to be higher than in the same period last year,” Shabbir Malik, Dubai-based research associate at EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank, said in an e-mailed answer to questions yesterday. “Provisions are still high because businesses continue to restructure their debt.”

U.A.E. bank lending remains “stagnant,” according to HSBC Holdings Plc, after the global financial crisis brought Dubai, the country’s business hub, to the brink of default on about $25 billion in 2009. State-controlled companies such as Dubai Holding LLC and Drydocks World LLC are still in talks with lenders to restructure debt. Dubai’s property market had one of the world’s biggest reversals of fortune when markets turned, with Deutsche Bank AG saying home prices slumped 64 percent since their peak in mid-2008.

Provisions set aside by the country’s banks may rise further, reflecting a central bank policy to shield them from the fallout of Europe’s debt crisis, said Jaap Meijer, head of the bank team at AlembicHC Securities.

More Provisions

“Provisions will continue to go up even if NPL’s stabilize by the end of this year or next,” he said in an interview. “Regulators are pushing for higher and more forward looking provisions” given the U.A.E.’s vulnerability to the “extremely dangerous” economic decline in Europe, he added. The “U.A.E. is looking the most vulnerable” in the six-member Gulf Cooperation Council, he said.

Non-performing loans in Dubai ranged from 8 percent to 10 percent at the end of 2010, according to Moody’s Investors Service. Of that, distressed loans to Dubai’s government related entities made up 3 percent or 4 percent. Banks set aside about $500 million to cover losses from Dubai World’s restructured loans, the International Monetary Fund said in May.

The yield on Dubai’s 5.591 percent dollar bond due June 2021 jumped 68 basis points, or 0.68 percentage point, since the beginning of September to 6.35 percent yesterday, data compiled by Bloomberg show. The yield fell six basis points today after Emirates NBD PJSC, the country’s biggest lender by assets, announced it was taking over unprofitable Dubai Bank PJSC on government orders. The average yield on GCC bonds for the period rose 54 basis points to 5.16 percent yesterday, according to the HSBC/NASDAQ Dubai GCC Conventional US Dollar Bond Index.

Central Bank Guidelines

Under central bank guidelines that went into effect Sept. 1, banks must submit monthly liquidity reports and periodic stress tests to reduce “the frequency and severity of banks’ liquidity problems,” according to the regulator.

“New requirements by the central bank on how to categorize loans and on provisioning have affected how banks take provisions since the beginning of the year,” said Mohammed Ali Yasin, chief executive officer for CAPM Investment PJSC. The government will continue to encourage greater provisioning for bad loans so long as local companies continue to show signs of weakness, he added.

While Dubai World reached an agreement to restructure about $25 billion with creditors in March, its real-estate developer Limitless LLC received a sixth extension on a $1.2 billion loan, two bankers familiar with the plan said Oct 4.

Deposits, Loans

Bank deposits declined 3.2 percent in August, the most this year, to 1,078 billion dirhams, according to central bank data. Loans rose 0.5 percent in the month to 1,056.8 billion dirhams, the data show.

“Liquidity is tightening and deposits are declining,” said Giyas Gokkent, senior economist at the National Bank of Abu Dhabi. “In cases where asset price decreases are as severe as has been in U.A.E., NPL’s as a percentage of loans was higher.”

Credit to the private sector in the U.A.E., which jumped 42 percent in 2008, may increase 2 percent this year and according to HSBC’s fourth-quarter report on the economies of the Middle East and North Africa.

“This suggests that corporates are unlikely to be exposed to the sudden credit squeeze that caused such difficulties before,” HSBC economists Simon Williams and Liz Martins wrote in the report. The country’s economic growth may accelerate to 3.3 percent in 2011 compared with 1.4 percent last year, according to IMF forecasts.

Dubai Default Risk

The three-month Emirates interbank offered rate, the measure at which banks in the U.A.E. lend to each other, tumbled 67 basis points since its peak this year to 1.49 percent yesterday, according to data compiled by Bloomberg.

Still, the default risk of Dubai, which isn’t rated, soared 165 basis points since reaching a low for the year on June 7 to 481 today, according to data provider CMA. Credit default swaps for Abu Dhabi, the U.A.E. capital that holds 7 percent of the world’s proven oil reserves, were at 118 basis points today, according to CMA, which is owned by CME Group Inc. and compiles prices quoted in the privately negotiated market. Abu Dhabi, which lent Dubai $20 billion to help the emirate recover from its debt crisis, is rated AA at Standard & Poor’s, the third-highest investment grade.

“We’re still in the aftermath of the housing market bubble, and there has been a debt restructuring taking place,” said Marios Maratheftis, chief economist for the Middle East and North Africa at Standard Chartered Plc. The surge in credit default swaps is driven “by mainly global events; the slowdown in the U.S. and the unresolved debt issues in the euro zone. In this global environment liquidity is at a premium,” he said.

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