When banks in the Gulf begin to post half-year financial results this month, analysts are expecting more of what they saw last year: write-downs on soured loans, weaker-than-usual profit figures and slow loan growth.
With Europe's debt crisis in full swing and chatter about a return to a recession intensifying, few see a bright light at the end of the tunnel. Combined with property and stock markets that continue to flag, as well as uncertainty about how banks will handle Dubai World's $23.5 billion (Dh86.31bn) debt restructuring, many analysts say banks are still a long way from a return to anything resembling the pre-crisis numbers.
Analysts will be watching a few key factors closely when the results come out. First and foremost will be whether banks make provisions in anticipation of write-downs on loans to Dubai World, which recently clinched a deal with its core creditors to restructure bank debt into new five and eight-year loans. They will also be paying close attention to provisioning for other defaults, including loan payments missed last year by a pair of Saudi conglomerates, Ahmad Hamad Al Gosaibi and Brothers and the Saad Group.
The UAE's Central Bank ordered banks to write off 50 per cent of loans to the groups last year, with the remainder held over for this year. Many banks appear to have taken care of their exposures already: total provisions at UAE banks fell month-on-month in May for the first time in more than 18 months. But it remains to be seen whether this trend will be borne out in financial results. Another closely watched factor will be loan-to-deposit ratios, which remain at 105 per cent for the UAE's banks as a whole, according to Central Bank figures. A lower proportion of loans in relation to deposits is considered a sign of stability, but most analysts do not expect any major movement in the first half, since loan growth is expected to have remained slow after a few quarters of stagnation.
New lending is expected to be fuelled mainly by retail banking and spending on government projects as private companies remain skittish about borrowing and expanding their businesses. Despite all those stresses, the UAE's banks have held up relatively well during the past two years, thanks to strong core business models and help from the Government, which has injected Dh120bn into the banking system to shore up balance sheets and loosen up lending. Last month, Moody's Investors Service put out a report maintaining its negative outlook for UAE banks but noting that "capital levels and strong core profitability have allowed them to absorb losses without significantly undermining their creditworthiness".
Here are the views of a few of the region's top banking analysts on the sector's financial fate for the first half: John Tofarides, analyst, Moody's Investors Service The banks need more liquidity and have been curtailing loan growth to manage that. But to continue to grow and expand their market shares and retain their strong franchise values, they have to generate the liabilities [by attracting deposits and raising money through bonds] first. In 2009 I think the focus was not on booking assets [making loans]. It was booking liabilities, and if they have liabilities on hand they could continue lending ? They were focusing on maintaining existing relationships and not starting any new relationships.
I'm more positive for 2011. The recovery is expected to be stronger, and the accumulation of a fiscal balance is high because of the high oil price. We're not expecting to go back to $75 per barrel like it was in March of 2009. After the crisis, the banks will focus on infrastructure and government-related business and projects in Abu Dhabi and secondly retail banking and thirdly corporate banking and zero real estate in Dubai.
As long as oil remains stable, we remain fine, but if it doesn't, then we maybe have a problem. Germaine Benyamin, research associate, Al-Futtaim HC Securities [The first half] will be better than last year, but compared to the first quarter, I think it's going to be a stagnant quarter. Banks are just waiting. There was nothing significant going on in the second quarter. We're not expecting any expansion on the lending side. The only thing we were concerned about this quarter was that the Central Bank would come out with a statement about how to provision for Dubai World. Provisions are already above the requirement of the Central Bank, so we don't expect a massive build-up of general provisions [in the first half] like what happened at the end of last year.
We're expecting things to improve by next year, but it's not bad what they're doing now. They're waiting on capitalisation and they're waiting in terms of lending. It's a year of cleaning and building capital. Next year they can tap international markets [for loans] and life goes on. We do like the attitude now. We don't want them to expand their loan portfolios. On the funding side, definitely, the Islamic banks are doing well, because it's more of a savings product. The problem is they cannot really lend to a lot of sectors. Their target is retail lending, and that's risky, and on the corporate side it's real estate, which is risky too.
Murad Ansari, vice president of equity research, EFG-Hermes In general terms across the region, we're looking at a mixed set of results. The key thing will be provisioning numbers. As far as loan growth, you're seeing a trend that points to slow and steady recovery. From a balance-sheet perspective, I think it's going to be slow. From an earnings perspective, provisions are going to be the key determiner of whether earnings are going to be growing.
We expect provisioning to decline in Oman, Saudi Arabia and Egypt, but where we see stress on provisioning is the UAE, and a major factor that could be driving that could be provisioning related to Dubai World's restructuring. While a final agreement has not been reached, there is a lot more visibility on what the final agreement will be. I think banks might not book complete provisions on Dubai World's restructuring, but they might book some general provisioning on anticipation of a restructuring.
The government has been a major driver for investments in the GCC region as a whole. Governments are taking a leading role in terms of investment spending, and the private sector is still slow to recover. The private sector, which was a major source of credit demand, has been relatively sluggish, and we're not seeing that picking up to where it was in 2008. Robert Thursfield, director, financial institutions group, Fitch Ratings
The first half of 2010 has been difficult for the UAE's banks, with rising retail and corporate impairments, debt restructuring at Dubai Government-related entities, reduced lending appetite and stubbornly high loan-deposit ratios resulting in some stagnation in the sector. The sector's capitalisation remains sound and should be sufficient to absorb the likely impact of the well-publicised problems of certain Dubai [Government companies] and the Saudi corporates Saad and Al Gosaibi.
In terms of half-year numbers, an important question is whether they are going to have to start taking provisions for Dubai World. We expect impairments to continue rising this year into next year, and liquidity stresses are still there. Capital [adequacy] is OK, but we expect support [from the Government] is less likely to be necessary. [On high loan-to-deposit ratios] everybody's chasing the same pool of domestic deposits, so they're having to pay more to manage those ratios. Lending isn't going anywhere. Some of that is less demand and some is funding constraints.
We expect [loan] impairments to rise during next year but not necessarily all the way through next year. It's difficult to say what will happen in the second part of 2011. firstname.lastname@example.org