Banks see hint of improvement

But exposure to Dubai World not yet taken into account

The tide of bad debt that has engulfed local lenders since the onset of the financial crisis may be starting to subside, as provisions for non-performing loans fell for the first time in at least a year. But the need for lenders to build safeguards against their exposure to Dubai World may mean that the strain on banks is not yet over. Analysts say banks could start setting aside provisions to cover their lending to the conglomerate as early as this month.

Total provisions for bad loans reached Dh48.8 billion (US$13.28bn) last month, a decline of Dh600 million from the previous month, Central Bank data show. "We've been looking for a topping out of NPLs [non-performing loans], and although we caution that this is only a single data point, it adds weight to the possibility that NPLs are nearing a peak, excluding those related to current restructurings of course," said Raj Madha, a senior banking analyst at Rasmala Investment Bank.

Signs of a levelling off of bad loans are expected first in the retail sector, as personal loans and credit cards were among the first wave of debt on banks' lending books to turn bad during the global credit crisis. Corporate impairments are likely to reach a peak afterwards, analysts say. Hit by the financial crisis, many consumers and companies struggled to meet debt obligations. Their troubles were compounded by a liquidity freeze that made it harder to refinance troubled loans.

The asset quality of banks has been significantly impaired by exposure to two financially troubled Saudi conglomerates, the Saad Group and Ahmad Hamad Al Gosaibi and Brothers, both of which first defaulted on financial obligations last year. Dubai World's announcement in November that it was seeking to restructure billions of dollars of debt added to the banks' problems. The conglomerate controlled by the Dubai Government said last month that the group's biggest creditors had accepted its proposal to restructure $23.5bn of debt.

Banks, however, have not yet booked provisions for their exposure to Dubai World, with analysts expecting that could begin before the end of the month. "We don't know for sure when this will start, and if there are no guidelines from the Central Bank, some of the big banks could start provisioning by the end of this quarter," said Germaine Benyamin, the senior banking analyst at HC Brokerage. The accounting treatment of provisioning was subject to agreements between Dubai World and its creditors with possible guidance from auditors and the Central Bank, Mr Madha said.

Two of the UAE's biggest banks, National Bank of Abu Dhabi and Emirates NBD, said in April they expected non-performing loans to rise to within 2 and 3 per cent of their total loans, respectively. Although specific provisions declined, general provisions rose again last month, to Dh13.6bn from Dh13.4bn in April. While analysts expect to see a gradual levelling off of non-performing loans, signs of a pick-up in lending are less apparent.

tarnold@thenational.ae

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