The UAE's banks came into this year hoping against hope for recovery after almost three years of stress, a period punctuated by a surge in bad loans in the wake of the global financial crisis and the bursting property bubble.
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In some ways, they got what they wished. Profits at all of the country's five biggest banks by assets rose in the first nine months of the year.
Emirates NBD, the largest, made Dh2.3 billion (US$626.1 million) during that period, almost surpassing its profits for all of last year. Abu Dhabi Commercial Bank, the third-largest, is on track to more than quadruple profits this year.
Analysts, however, say the picture is more muddled than such positive numbers might suggest. While profits are on a rebound, the underlying performance of some banks has not been stellar.
Profits at Emirates NBD, for example, have risen primarily because of the sale early this year of a 49 per cent stake in its payments-processing company, Network International, for a Dh1.8bn gain. Stripping that out, the bank has fared worse this year than last.
"It's more or less a mixed picture," says Jaap Meijer, the head of banks research at HC Securities in Dubai. "You see slow improvements, but there's definitely not much growth in Dubai, particularly if you're close to the public sector."
Indeed, Dubai and its financial troubles have continued to be culprit number one for the UAE's banks this year. Many banks that lent to Dubai World, the government-owned conglomerate that completed a $24.9bn debt restructuring this year, had already set aside cash last year as a buffer against their exposures. But they added provisions this year for exposures to Dubai Holding and other government-linked companies that have either restructured loans or are in negotiations to do so.
Total provisions for non-performing loans in the UAE's banking system have risen by Dh7.6bn this year to Dh51.9bn in October, according to Central Bank data.
Bad loans were not the only items on banks' lists of worries, however. In a report last week, analysts at Fitch Ratings, the global credit ratings agency, warned of "new headwinds" facing the UAE's lenders that go beyond the "fragile real estate sector" and "ongoing problems in Dubai".
One key concern, Fitch said, was an apparent slowdown in the pace of development in Abu Dhabi, where some projects have been scaled back or put on hold. Banks had come to rely increasingly on financing state-backed projects in the capital as business in Dubai stagnated.
"Abu Dhabi has been cutting its spending on construction-related projects, owing to concerns about the significant oversupply in the real estate market, an increase in the emirate's financial commitments, and the slowdown in the global economy," the report said.
While a rationalisation of projects in Abu Dhabi may benefit the economy in the long run, Fitch said it "could have some implications" for banks' loan books in the short term.
Banks have also had to deal with new Central Bank limits on personal lending and fees that have curtailed growth in their retail books. The limits, announced in February, put a cap on personal loans of 20 times a worker's monthly income and mandated repayment within four years. Deposits also have stagnated this year. While they rose by 1.3 per cent in the first 10 months of the year to more than Dh1 trillion, according to Central Bank data, loans grew at a faster clip of 4.1 per cent. And the total value of loans in the UAE's banking system continues to be higher than its deposits by a slight margin.
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Then, of course, there is the sovereign debt crisis in Europe. Analysts say the UAE's banks are somewhat protected from its effects by their healthy cash positions and lack of reliance on international interbank lending markets. Still, the irresolution of Europe's fiscal woes has cast a pall over banks everywhere, including the UAE.
"Next year will be a challenging year as well because of the ramifications of the European crisis," Mr Meijer says. "I'm quite negative on Europe, and it's very dangerous what's happening. It's like 2008 all over again except governments are already stretched to the limit."
Banks have responded to this year's challenges in various ways. Some have cut costs and found other creative ways to bolster their margins. Abu Dhabi Commercial Bank, for example, took on more than 400 outsourced workers in the first nine months of the year, according to a recent bond prospectus, presumably in an effort to keep expenses down as it grew.
"Outsourcing workers has three main advantages," says Raj Madha, a banking analyst at Rasmala Investment Bank in Dubai. "It allows management to focus on other areas, it provides a more flexible workforce and it reduces costs."
Overall, this year has been relatively flat for local banks, Mr Meijer says, adding he expects more of the same next year. Nonetheless, he says lenders across the region could at least take comfort in the fact they are not fully at the mercy of Europe's troubles.
"We think [the region] will be affected but we think the region will be resilient," he says.
"The liquidity position of the banks generally is stronger than a couple years ago, and they don't rely much on interbank funding, so there's no stress in the funding markets. You see some blips, but there's no repeat at all of the 2008 scenario."
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