Investors getting too gloomy on UAE banking outlook

Are any of the UAE banks in any danger of failure? Would the magnificently capitalized UAE Government not bail them out if they did? Yes, losses from bank lending to the like of Dubai World will be onerous but they are not going to prove fatal.

The Abu Dhabi Commercial Bank is the latest to reveal the extent of its exposure to Dubai World. It posted a second quarter loss of $144 million and said its exposure to the beleagured Dubai state-owned conglomerate amounted to $1.8 billion.

Fear of provisions worse than reality?

Last week Emirates NBD, partly owned by Dubai Government, posted a 51 per cent decline in second quarter profits to $108 million and said it expects to take provisions against Dubai World in the second half of 2010.

These figures are far from great but they are not indicating the end of the road for the local banks or anything like it. The fear is always that more lurks beneath the surface in the shape of unrealized bad loans and loans to projects that will never be completed.

It would be astonishing if this was not true. But how bad is it? Is it as bad as the depressed share prices of the banks suggest? Are we in a situation where the UAE will never recover or remain in a recession for a decade? Again, almost certainly not.

Oil cash flow

The cash flow from oil ought to catch any banker’s eye. Liquidity is what stops an economy from liquidating after a recession. The UAE has the cash flow to tide it over – and it does not even have to dip into the sovereign wealth funds, except for Dubai which is selling off assets to pay down its debts.

Eventually the UAE banks will dig themselves out of the hole in their balance sheets. In the worst case scenario the sector might undergo some forced marriages of convenience in a consolidation process. That will set the market up as leaner and fitter for the next boom.

For investors there has probably never been a better time to buy selected UAE banking stocks, and as soon as the Dubai World debt rescheduling is signed that opportunity will be gone for good. See the next edition of the ArabianMoney newsletter for our favorite banking stocks.