Abu Dhabi Banks Stronger Than Dubai on Loan Growth: Arab Credit

Abu Dhabi’s banks are posting stronger earnings than Dubai’s as lending in the United Arab Emirates’ capital increases and the highest provisions in more than a year curb profit for Dubai lenders.

Abu Dhabi’s three largest banks posted better-than-expected profit in the third quarter, while Dubai-based Emirates NBD PJSC, the U.A.E.’s biggest lender by assets, missed estimates. Provisions for non-performing loans in the the Persian Gulf nation rose 14 percent in the first nine months of 2011 to 50.4 billion dirhams ($13.7 billion), the highest since at least April 2010, when Bloomberg began tracking the country’s banking data.

“Banks in Abu Dhabi have suffered much less from their exposures to government-related issuers and are still managing to grow their loan books in what is a subdued operating environment,” said Khalid Howladar, a senior credit analyst at Moody’s Investors Service in Dubai. “Profitability for Dubai banks will continue to be suppressed for the coming quarters on the back of reduced loan growth and continued provisioning.”

U.A.E. banks are starting to recover from the worst financial crisis since the 1930s, which curbed lending and forced them to take provisions against some of Dubai’s government-related entities. State-controlled companies including Dubai Holding LLC and Drydocks World LLC are still in talks with lenders to restructure debt.

Higher Dubai Risk

The default risk of Dubai, which isn’t rated, was at 421 basis points today, according to data provider CMA, which is owned by CME Group Inc. That’s almost four times higher than Abu Dhabi’s, which was at 111 basis points, according to CMA, which compiles prices quoted in the privately negotiated market.

The yield on Dubai’s 5.591 percent dollar bond due June 2021 fell 56 basis points, or 0.56 of a percentage point, in October to 5.68 percent. It advanced to 5.89 percent today. The yield on Abu Dhabi’s 6.75 percent dollar bond due August 2019 dropped 21 basis points last month to 3.43 percent. It has since risen to 3.57 percent.

The average yield on GCC bonds declined 20 basis points in October to 4.8 percent, according to the HSBC/NASDAQ Dubai GCC Conventional US Dollar Bond Index.

Emirates NBD profit declined 59 percent in the third quarter as the impairment allowance for bad loans jumped 27 percent to 1.57 billion dirhams. The bank said it expects its impaired loan ratio to peak at 15 percent to 16 percent in 2013 compared with 12.9 percent at the end of September. Emirates NBD shares have risen 20 percent this year.

Higher Provisioning

“ENBD clearly had much higher provisioning than expected due to its Dubai Holding exposure,” said Ankur Shah, analyst at Arqaam Capital. “A few of the Abu Dhabi-based banks also have this exposure, but chose not to take the provision for Dubai Holding this quarter because they wanted to wait for the restructuring to be complete.” Provisioning will remain “elevated for the Dubai banks well into 2012,” he said.

Moody’s is maintaining its negative outlook for the U.A.E. banking industry “to reflect the ongoing trends of corporate deleveraging, asset quality challenges and the banks’ subdued profitability in the wake of continued provisioning needs,” it said in a report e-mailed today.

Banks in Abu Dhabi, the fourth-largest oil producer in the Organization of Petroleum Exporting Countries, have mostly posted third-quarter earnings that beat analyst estimates.

National Bank of Abu Dhabi PJSC, the United Arab Emirates’ second-biggest bank by assets, said profit increased 12 percent to 1.03 billion as gains from foreign-exchange transactions offset investment losses. Abu Dhabi Commercial Bank PJSC, the country’s third-biggest lender, reported a 91 percent jump in profit, helped by a fall in interest expense and provisions, while First Gulf Bank PJSC, controlled by Abu Dhabi’s ruling family, showed an 8 percent gain.

NBAD shares have gained 7.7 percent this year, ADCB’s jumped 42 percent, while FGB’s dropped 12 percent in the period.

Third-Quarter Profit

“In the U.A.E., third-quarter profits have mainly been driven by trends in volume growth and provisions,” said Giyas Gokkent, senior economist at NBAD. “In terms of volumes, assets of top five listed banks in Abu Dhabi grew by 8.6 percent year-on-year compared with a 1.5 percent decline in the assets of top four listed Dubai banks.”

In terms of loan growth, Abu Dhabi’s top five listed banks posted a 6.5 percent increase compared with 3.5 percent in the overall sector, Gokkent said.

U.A.E. bank loans exceeded deposits for the first time in a year as deposits dropped 11.1 billion dirhams in September from August, central bank data showed on Oct. 27. Loans surpassed deposits by 7.9 billion dirhams in September, the first time they have since September 2010.

Abu Dhabi 2030

Banks in Dubai are expected to have done most of their provisioning by the end of the year, said Moody’s Howladar. Non-performing loans at U.A.E. banks are expected to peak at about 14 percent this year, he said. In March, Howladar said he expected NPLs to peak at 12 percent.

“Growth in the second half of the year has been a bit weaker than expected due to more global economic stresses,” he said. “Abu Dhabi problem-loan levels will be broadly lower than Dubai levels.”

Non-performing loans in Dubai ranged from 8 percent to 10 percent at the end of 2010, according to Moody’s. 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.

“Higher volume growth is likely to persist for Abu Dhabi-based banks compared to other banks in the U.A.E. given Abu Dhabi’s 2030 plan and profitability will be affected positively by growth in volume,” said NBAD’s Gokkent. “Beyond that, the key driver in the near term with regards to profitability will be the path of provisions.”

Abu Dhabi is planning to spend $500 billion by 2030 to reduce its dependence on energy resources and build up industries from transportation to real estate.

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