Shockwaves from Europe's sovereign debt crisis have been reverberating through the continent's banking system.
A rash of worse than expected second-quarter earnings figures have illustrated the depth of the problem. UBS was among the hardest hit, as profits dropped by nearly half, while Deutsche Bank blamed its lower than expected earnings on the euro-zone debt turmoil.
HSBC was among the few banks to buck the trend, although the European banking giant plans thousands of layoffs to cut costs worldwide.
In contrast, UAE banking earnings suggest the country's lenders are entering the second half of the year in generally better shape.
The results of the two biggest banks have set a broadly upbeat feel to the earnings season. Net profits for Emirates NBD, the biggest bank by assets, surged 84.8 per cent to Dh744.4 million (US$202.6m) in the second quarter compared with the same period last year.
National Bank of Abu Dhabi, the second-biggest bank, reported a 2.5 per cent rise in net profits to Dh1.03 billion.
"Profitability is good in the UAE," says Raj Madha, a banking analyst at Rasmala Investment Bank. "Banks are extremely well capitalised here and have a relatively small amount of subordinated capital compared to the EU."
Analysts say the results point to an improving outlook for the sector, supported by a strengthening local economy.
But hurdles remain to stronger growth. Banks have yet to channel an easing of liquidity levels towards significant increases in lending.
During the past two years, banks had been buffeted by the financial crisis, followed by a major restructuring of loans by some Dubai corporations.
Dubai World, a conglomerate owned by the Government, reached a deal in March with banks to reschedule the payment of $24.9bn in loans.
Banks have been busy cleansing their balance sheets of a build-up of debts, or non-performing loans (NPLs). Results so far suggest many are making progress in getting their businesses back on an even keel.
Provisions taken by Mashreq to cover loan losses fell by 29 per cent to Dh637m in the first six months of the year. As a result, the lender reported a 41 per cent rise in second-quarter net profit to Dh286.3m.
First Gulf Bank beat analysts' forecasts by posting a 13 per cent rise in net profit in the quarter to Dh890m, while Union National Bank also trumped estimates by reporting a 23.1 per cent increase in net profit to Dh415.3m. Commercial Bank of Dubai announced its second-quarter net profit rose to Dh260m, up 1.8 per cent from the same quarter last year.
Not all banks have yet reported, with Abu Dhabi Commercial Bank expected to report later this week.
Analysts disagree about the extent to which the UAE banking system has been bolstered by the unrest afflicting some other Arab economies this year.
"The regional unrest has prompted high net-worth individuals from the troubled Arab countries to move some of their savings and investment to more stable markets such as the UAE," said the Institute of International Finance, in a report about the UAE economy last month. While others disagree, data show the banking system has been boosted by a 7.3 per cent rise in deposits in the first six months of the year. In absolute terms, a Dh74bn increase in deposits during the first five months of the year outstripped a Dh67bn rise during the whole of last year.
Lending has grown at a more measured pace as banks have sought to rebalance loan-to-deposit ratios.
As a result, such ratios have fallen from a peak of 109.5 per cent at the end of 2008 to 93.3 per cent in May this year.
But if there is still a fly in the ointment for banks, it is bad loans. The cloud of NPLs has been hanging over the banking system for two years. "The biggest challenge for UAE banks is the continued high cost of risk, as banks continue to strengthen their loan loss reserves, particularly for commercial real estate," said Jaap Meijer, the head of banks research at AlembicHC,
The combined provisions of banks rose from about $6.8bn at the end of 2008 to $16.5bn at the end of May this year.
Provisioning is expected to continue at least until the end of the year, say analysts.
"Deleveraging is working its way through the system but the challenge now is to find pockets of growth," Mr Madha said.
"The places where banks like to lend to are where companies are investing in growth because they need extra capacity or where it's driven by demand.
"They don't want to lend to struggling businesses looking for money to shore up working capital."
In effect, that means banks are likely to remain more selective about who they lend to.
[ tarnold@thenational.ae ]