UAE banks weather global storm, Mashreq battens the hatches

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Few large banking groups in the world can report a mere 14 per cent slide in profits to $446 million for 2008, but that is what Dubai’s Mashreq Group posted yesterday.

Mashreq Group is the banking arm of the Al Ghurair family and its shares are also quoted locally. The Al Ghurairs own a multi-billion dollar trading empire, and are often admired for their conservative approach to management.

But this is a sensible approach for a group with so much to lose by taking excessive risk, much of it the personal wealth of its owners. The bank has also avoided any exposure to the Madoff scam or Lehman Brothers.

High provisions

And yet Mashreq has provisions equivalent to 1.36 per cent of performing loans, the highest among UAE banks. The bank also has a 14:1 capital adequacy ratio, well above the UAE Central Bank requirement of 10:1.

For 2009 CEO Abdul Aziz Al Ghurair said: ‘While the liquidity crunch is expected to continue for most part of the year, we expect the banking sector to resume normal growth levels as the global economy stabilizes.

‘Liquidity and capital management will be our top priority. Soundness, not revenue growth, will be the key theme for Mashreq in 2009 as we invest to further fortify our foundation.’

Conservative banks

UAE banks are thus far emerging reasonably well from the global financial crisis, although the crisis only really impacted on the fourth quarter of 2008 because the oil price reached a record high in July. Annual results for 2008 therefore do not necessarily give a good indication of the outlook for 2009.

The global credit crunch of the fourth quarter came on top of a collapse in oil prices, and brought the previously booming real estate crashing down to earth. In addition, a much stronger dollar has made tourism expensive at a time of falling demand from recession-hit countries.

Local banks are bracing themselves for a rise in bad loans due to the sudden end of the six-year oil boom. So far there has not been a single property repossession but this can only be a matter of time as real estate prices have crashed since the autumn.

Realty reality

But mortgage portfolios are tiny for the UAE banks. It is the loans to property developers and contractors that will turn bad, although newspaper reports about the dumping of thousands of cars have been dismissed as highly inaccurate by police officials.

On the other hand, as expatriate redundancies mount there are bound to be problems with auto, credit card and other personal loans. That makes the conservative approach of Mashreq highly appropriate.

But it looks highly unlikely that the UAE will face anything like the banking crisis seen in the so-called developed world, something that can only reinforce its status as the Switzerland of the Middle East.