Dubai debt hangover to peak by end of year

The UAE's financial system remains burdened with bad loans three years on from Dubai World's $25 billion debt restructuring, Moody's warned yesterday.

The UAE Government injected billions of dirhams during the financial crisis in 2008 and 2009 in an effort to steady local lenders' balance sheets. Silvia Razgova / The National

The amount of cash that UAE banks must set aside for bad debts is expected to peak this year before beginning to decline next year, according to Moody's, the international ratings agency.

That said, Moody's added, the bad debts left over from Dubai World's US$25 billion (Dh91.83bn) debt restructuring are still weighing on the nation's financial system.

"We expect profitability to remain constrained by cautious loan growth and the ongoing provisioning that is required to cover elevated problem loan levels, against a background of mixed signs of a recovery and our expectation that the performance of UAE banks' net earnings will remain uneven over the coming 12-18 months," Moody's said in a report.

Capital set aside to cover bad debts in the UAE has been described as the lowest in the Arabian Gulf but could yet rise. On November 26 2009, the UAE's financial sector was rocked by an announcement that Dubai World, a conglomerate owned by the emirate's Government, and Nakheel, the builder of Dubai's man-made islands, would seek to renegotiate billions of dollars of impending debt repayments.

Corporate restructurings continue to reverberate around the financial system with companies including Dana Gas and Dubai Group in talks with lenders.

The Central Bank and Ministry of Finance injected billions of dirhams during the financial crisis in 2008 and 2009 in an effort to steady local lenders' balance sheets.

Dubai's Government has since helped Dubai Bank, which was acquired in May last year by Emirates NBD following a clean-up of its balance sheet by the federal Government.

Despite the support from governments, bank lending has grown at a snail's pace this year, constrained by Central Bank limits on how much can be loaned to local governments and their commercial holding companies.

But the lack of stronger bank lending was halting the emergence of a stronger recovery in the UAE's economy, said Shehab Gargash, the chief executive and managing director of Daman Investments.

"We lost an opportunity a few years back when, at the height of the crisis, the government had come in and pumped liquidity into the system, without guidance of what they expected from the banks," he said.

Despite an improvement in capitalisation levels, banks by and large had refrained from their responsibility to lend to the wider economy, added Mr Gargash.

"Banks in fact remain braced for the worst, acting in self-preservation over their message and commitment to their markets," he said.

Net loans and advances across the financial system have risen 1.8 per cent this year to Dh1.09 trillion, according to the latest data from the Central Bank.

The sluggish increase in lending was eclipsed by a rapid growth in deposits, allowing banks to repair their balance sheets.

Moody's said it expected credit growth of 4 to 7 per cent for the next two years as a result of "weak confidence".

Moody's also said that the $10bn restructuring of Dubai Holding, an investment vehicle owned by the Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, would not be resolved this year.

Four banks - Royal Bank of Scotland, Commerzbank, Standard Bank and Commercial International Bank - earlier this year began arbitration in London against Dubai Group, a unit of Dubai Holding, in an effort to resolve the impasse in a restructuring that has dragged on since 2010.