Property fears for Gulf banks

The banking industry's exposure to the property market could hurt the shares of several Abu Dhabi banks, HSBC says.

Dubai Marina under construction. Developers such as Aldar, Nakheel, Sorouh and Union Properties have low debt to equity ratio and rely less on bank loans than second tier developers to raise capital.

The banking industry's exposure to property and a tight credit market could hurt the shares of several Abu Dhabi banks, HSBC analysts said in a note today. HSBC lowered its target price on all the major Abu Dhabi banks it covers, downgraded its ratings on First Gulf Bank for its overexposure to the property market, and warned about the slow growth of deposits relative to robust lending and lack of transparency in the real estate market. "We believe that 70 per cent of construction loans in 2007 went to the second-tier development segment, which is the least transparent of the industry sectors," HSBC analysts said. The note said that first tier developers such as Aldar, Nakheel, Sorouh and Union Properties have low debt to equity ratio and rely less on bank loans than second tier developers to raise capital. Deposits are the cheapest source of funding the lending business. However, with low interest rates, high inflation, and a booming economy consumers and companies have little motivation to save. This has caused banks to increasingly borrow to fund their lending business, but the global credit crunch has raised the cost of borrowing on international markets. @Email:[e-mail]