DUBAI // With the ratio of non-performing loans to total loans almost doubling in the first nine months of last year for the 30 Gulf-based banks rated by Standard & Poor's, it is no wonder the ratings agency has a negative outlook for one third of them. In a research note released on Monday, S&P said there was a marked increase in this ratio; on average, non-performing loans were 5.4 per cent of total loans, up from 2.7 per cent at the close of 2008.
Accounting for most of this increase, S&P said, were banks in Dubai and Kuwait. Also contributing were some of the rated institutions from around the Gulf with exposure to the Saudi concerns Ahmad Hamad Al Gosaibi and Brothers and the Saad Group. Asset quality indicators are also on the decline. In its report, S&P said the provisions made to cover non-performing loans now stood at 86.8 per cent of the total value of non-performing loans, from 151.3 per cent during the first nine months of last year.
"We expect asset quality indicators to further deteriorate in the next few quarters as the economic slowdown continues to take its toll on the corporate and retail sectors," said Mohamed Damak, an S&P credit analyst. Dubai World debt payment negotiations are playing a big role. In its weekly credit watch, released on Monday, Moody's Investors Service estimated that UAE banks could lose 9 per cent of the capitalisation they had at the end of last year if Dubai World repaid its debts at only 60 cents on the dollar. Moody's indicated that rated UAE banks had an overall exposure to Dubai World of Dh55 billion.
Such a loss for the banks "would hurt 2010 profits, but not jeopardise solvency", said John Tofarides, an analyst at Moody's. On a brighter note, Moody's said that none of the 13 UAE banks it rates - covering about 85 per cent of the total loan market - was expected to be in breach of the minimum 8 per cent capital adequacy ratio set by the Ministry of Finance, even in the case of a 40 per cent haircut on Dubai World exposure.
Views from both ratings agencies were not encouraging for investors yesterday. They offloaded financial services stocks on the two main UAE equities markets. Most banks traded lower, with Emirates NBD, the country's largest lender, ending 5 per cent lower. According to S&P, the financial standing of Gulf banks as a group remained under pressure despite recent signs of an overall economic recovery. Lower business volumes, provisioning needs and pressure on liquidity continue to affect the creditworthiness of different banks in varying degrees.