UAE bank provisions too low says Moody's
Posted on 04 October 2009 with no comments from readers
Caught napping last year by the US financial crisis the rating agencies are hoping to prove sharper in spotting potential problems in the UAE banking sector today.
Moody’s has just issued a report critical of the UAE banks for not yet taking adequate bad debt provisions against potential defaults from construction and property loans. It claims a 2.5 per cent loan loss provision to total loans is insufficient.
The National says central bank data shows UAE bank loans total $272 billion with only $7.1 billion in provisions for non-performing loans.
Property loan portfolio
It is hard to estimate what proportion of the total loans are for construction and property. Officially the limit for loans to real estate is 20 per cent but the actual percentage could be much higher as general personal and corporate loans have also been used for this purpose.
On a 20 per cent fall in real estate values and $80 billion in total real estate loans there would be provisions of $16 billion against $7.1 billion taken to date. Indeed, that seems conservative given property price falls of 50 per cent in Dubai.
To add to these potential bad debts from the property crash there are also clearly going to be increases in provisions for credit card and unsecured loans, for example by car owners fleeing the country. Family businesses and small companies are also in trouble with business activity down and their debts are rising.
As The National highlights the focus of attention has been on Dubai’s sovereign debt of $85 billion or more, and this has kept attention away from the heavily indebted private sector.
Moody’s is therefore right to raise this issue and demand that the central bank require banks to come clean. For only when the laundry is hung out to dry can you really see what remains to be done.
1980s precedent
In the mid-1980s after a similar problem with overbuilding and bad debts Dubai banks were forced into consolidation and several names disappeared. It would not be inconceivable if a similar process of mergers and consolidations followed in the wake of the current financial crisis.
Indeed, new national champions of greater size and strength could then emerge from the ashes of the real estate crash. And ironically enough the biggest market opportunity would then be lending to individuals wanting to buy real estate.
Until then stock market investors are bound to be wary of banks with question marks over their profitability and future as independent concerns.
