Flat growth scenario for UAE banks in 2012 predict agencies as deleveraging bites

Even the cushion of record oil revenues in 2011 is unlikely to offset the continuing drag of bad loan provisions from the real estate bust in the UAE on the local banking sector. This restriction on local lending will dampen the growth outlook for the economy that is actually far healthier than most other countries for 2012.

Moody’s analyst Nicolas Charnay told Gulf News: ‘Large distressed exposures of government-related entities [GREs] will continue to push up system-wide non-performing loans [NPLs]. We expect that NPLs will peak next year in Dubai at around 13-15 per cent and this year in Abu Dhabi at [a] lower level of around 8-10 per cent.’

The newspaper also quoted S&P’s Timucin Engin saying: ‘In the UAE, we expect to see continued deleveraging or a very limited [loan] growth scenario for the major Dubai banks in 2012. This is because these institutions are largely focusing on managing their existing exposures, owing to their pronounced asset quality issues.’

European crisis impact

Analysts expect the UAE banks to raise money locally rather than seek international channels because of the mounting sovereign debt crisis in Europe, traditionally the source of more than half of money raised in bond issues.

However, the core strengths of the highly-capitalized UAE banking sector remain formidable with both the cash flow from oil revenues of over $100 billion this year, and a local recovery in tourism, hospitality, aviation, retail spending, luxury auto sales, commodities and trade.

Really the depression in local business is now focused on financial services, media and real estate, although there has been a stabilization of house prices in Dubai and some rises in villa prices due to emigres from the Arab Spring. Abu Dhabi’s recent cuts in public investment ranging from the suspension of the museum island project to massive job losses on The National newspaper are worrying, however.

2012 GDP growth

All the same the UAE is predicted to grow its GDP by 3.8 per cent by the IMF next year, a world away from the recession now expected in Europe. The national economy is delivering an expansion even if it is held back by the drag of the bad loans from the real estate sector on the banks.

But a growing economy will gradually take up the vacant space in the real estate sector and allow the banks to be repaid, it just takes time. Whether that can be achieved without further consolidation and restructuring of local balance sheets is unlikely, and that may at times make this process feel more of a problem than it actually proves to be.

If the rest of the world faced the outlook of the UAE for 2012 everybody would be smiling but sadly that is just not the case and another reason to be cautious about predicting a bigger recovery in the Emirates where Europeans are important for trade and tourism as well as finance.