The first half of last year was stellar for the UAE's banks by virtually any measure. Profits were more than healthy, loan books had grown by almost 50 per cent, and the development boom and high oil prices that let banks rake in the gains seemed unlikely to slow down. "The UAE banking sector should continue to enjoy robust top and bottom line growth," Deepak Tolani, an analyst at Al Mal Capital in Dubai, wrote in a research note in May last year.
Mr Tolani cited oil prices, strong loan growth and continued investment in infrastructure and development as reasons the UAE's lenders would stay profitable in the medium term. There had been murmurs by then of trouble in the US, where banks had given mortgages to too many people who could not afford them. But it appeared last summer as if the subprime tempest would be a teacup-scale event in the Middle East.
If anything, the prevailing thought was that the problems in the US would help banks and other financial institutions in the region, giving them a share of the economic prowess the US had squandered. Yet by the beginning of autumn, when banks in the developed world started to fail and the phrase "subprime crisis" was abandoned in favour of "financial crisis", it quickly became clear that the UAE's banks would not be spared the turmoil.
International investors and international banks had played a large role in financing economic activity in the UAE, and this large pool of money was drying up. Interbank lending rates, the rates banks charge each other for loans, rose from 2.1 per cent to 4 per cent in the third quarter of last year. That meant banks were either finding it harder to secure funds to lend or growing increasingly uneasy about lending, leading them to charge higher interest.
Both these were probably true, to some degree. Whatever the reasons, though, banks were suddenly falling on hard times just as the two drivers of expansion in the UAE, expensive oil and development on a huge scale, encountered their own stumbling blocks. The Central Bank responded by making Dh50 billion (US$13.61bn) available to banks in September last year. But interest rates on this initial credit facility were fairly high, meaning banks had to be sure they could pass on relatively high interest rates to customers before accepting the money.
The Government has since taken a raft of other steps to help the UAE's banks slog through the financial crisis. Early this year the Ministry of Finance announced a plan to inject Dh70bn into the country's banks to strengthen their balance sheets. While this money was initially classed as deposits, which are liabilities on banks' balance sheets, banks were later allowed to convert it into long-term assets, which improved their measures of stability. The Abu Dhabi Government also injected Dh16bn into five local banks in February.
Roughly a year from the beginning of the economic storm, it remains unclear just how much the Government's rescue measures have helped the UAE's banks. Many are still struggling with a surge in bad loans. During the first half of this year, banks set aside almost Dh5bn in provisions to tackle a rise in defaults. Meanwhile, banks' profits are also suffering. Among the UAE's publicly listed banks, profits were down by 27 per cent in the second quarter, compared with the same period last year. That is not as bad as Bahrain or Kuwait, where listed banks' profits plunged 73 per cent. But Saudi Arabia's and Qatar's banks fared better.
It is hard to say just when the region's lenders will emerge from the financial crisis. Many analysts expect more money to be set aside by banks to cover bad loans this year, alongside further falls in profits, with a recovery starting sometime next year. Analysts, however, have been wrong in the past, and the timing of the recovery may well depend largely on the timing of a rebound in the sectors to which the country's banking system is deeply linked: property, hospitality and energy.
afitch@thenational.ae