It has not been an easy few months for major financial institutions, particularly in the West. When not revealing huge losses and major provisions, their bosses have been grilled by politicians and humiliated on television.
They have had to turn to taxpayers to bail them out and lay off staff. Some banks have been forced into shotgun marriages, at times weakening even further what were once robust institutions. Many are now trading on the stock market at a fraction of their value just a year ago.
It has been difficult for banks in the UAE too, but as most banks have now released their preliminary financial results for last year the fog of uncertainty that prevented analysts from assessing their health has been lifted.
What has been uncovered is a banking sector that seems to have come through the final quarter of last year - in which stock markets declined and financial institutions worldwide generally went haywire - in a state of relative health. Although most local banks saw their net profits decline last year compared with 2007, nearly every bank still made a profit. Few of the large western lenders were so fortunate.
"So far, the profitability is very good," says John Tofarides, a ratings analyst at Moody's Investors Service in Dubai. "And better than elsewhere."
Of the five large banks based in Abu Dhabi, four have reported an increase in annual net profits. The exception is Abu Dhabi Commercial Bank (ADCB), which posted a 35 per cent decline. Dubai banks also remained profitable, although less so than those in the capital. The final quarter proved punishing for the entire sector as the financial crisis set in.
"The fourth quarter was the litmus test," says Andrew Gilmour, an economist at the Samba Financial Group. "All of the banks are going to be retrenching, balancing their books, deleveraging."
In general, the Dubai-based banks were hit slightly harder than those based in Abu Dhabi. Nearly every Dubai-based bank reported a lower net profit for last year compared with 2007, whereas only ADCB in the capital reported a decline in profit. The trend makes sense, according to economists, given that Abu Dhabi's banks are less dependent on the foreign funds that dried up towards the end of last year, and the property sector.
"The Dubai banks have more exposure to the real estate market here, either directly or indirectly," says Eckart Woertz, an economist at the Gulf Research Center.
Overall, the biggest problem for UAE banks was the extra loan loss provisions they took in the fourth quarter - emergency funds set aside for an expected rise in defaults.
Some banks also suffered losses on their investment portfolios, especially on the stock markets. Investbank, a local corporate and retail bank based in Sharjah, reported a 98 per cent decline in net profits for last year, following losses on local and international markets.
If stocks and property values continue to decline this year, analysts say banks could again suffer similar losses. The truth is, however, that analysts will not know the full story of what happened last year in the local banking sector until the banks release their complete financial statements, within the next month or two. At that point, it will become clearer which banks are more exposed to those parts of the economy that are likely to deteriorate in the year ahead, particularly the property market. Until more data become available, analysts paint an optimistic, although mixed picture of the sector's outlook for the year.
The good news: as most bankers are eager to say, in times like these taking extra provisions is prudent, and signals strength on the part of the bank. Although net profits might have been higher had the banks not taken extra provisions last year, they would have been hit doubly hard in the months ahead if more and more borrowers, as expected, miss payments on their loans.
The bad news: What we saw in the fourth quarter of last year probably was not the last bout of unusually large provision-taking. Although some banks set aside hundreds of millions of dirhams, economists tend to agree that with house prices on the decline and economic activity steadily losing momentum in the GCC, loan quality is likely to get worse before it gets better. That means even more provisions will be necessary this year, and even lower net profits.
"With loan-loss provisioning, we know that the fourth quarter of 2008 was just the beginning of the story. The asset quality contraction is definitely going to be reflected in the first and second quarter of 2009," says M.R. Raghu, the head of research at the investment firm Markaz.
Moreover, one of the main factors that kept local banks profitable last year was the three quarters of highly profitable activity that came before the financial crisis hit the region last September. That buffer will not be there this year.
Thankfully, the Government has indicated it is ready to provide significant help to the banking sector. In the past few months, the Federal Government has promised as much as Dh120 billion (US$32.67bn) for local banks, Dh50bn of which has already been infused into the banking system in the form of long-term deposits. The individual emirates have also provided aid, with Abu Dhabi injecting Dh16bn into five banks based in the capital last month. No similar move has yet been taken by Dubai, although the Government there has pledged to use the first $10bn of its recent bond issuance to help state-owned property developers, which should in turn help the banks who lend to them.
Overall, perhaps the biggest factor affecting the performance of banks this year will be the extent to which borrowers increasingly default on their loans. If the rise in loan delinquencies exceeds banks' preparations, then they could suffer further declines in profitability. Banks must walk a fine line between being too cautious and not cautious enough.
"We expect a sharp increase in the provisioning," Mr Raghu says. Banks have started doing that in the fourth quarter, he says, and he expects it to continue in the first and second quarters of this year. "Any increase in loan-loss provisioning will definitely impact your bottom line. The overall banking system is going to be experiencing a sharp drop in profitability," he says.
In other words, it's not going to be an easy year for all of the banks in the region, but in the circumstances, it could be much worse.
tpantin@thenational.ae
if you go
The flights
Emirates have direct flights from Dubai to Glasgow from Dh3,115. Alternatively, if you want to see a bit of Edinburgh first, then you can fly there direct with Etihad from Abu Dhabi.
The hotel
Located in the heart of Mackintosh's Glasgow, the Dakota Deluxe is perhaps the most refined hotel anywhere in the city. Doubles from Dh850
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Events and tours
There are various Mackintosh specific events throughout 2018 – for more details and to see a map of his surviving designs see glasgowmackintosh.com
For walking tours focussing on the Glasgow Style, see the website of the Glasgow School of Art.
More information
For ideas on planning a trip to Scotland, visit www.visitscotland.com
Company%20Profile
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The specs
Engine: 2-litre or 3-litre 4Motion all-wheel-drive Power: 250Nm (2-litre); 340 (3-litre) Torque: 450Nm Transmission: 8-speed automatic Starting price: From Dh212,000 On sale: Now
SPECS
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Confirmed%20bouts%20(more%20to%20be%20added)
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Company profile
Company: Verity
Date started: May 2021
Founders: Kamal Al-Samarrai, Dina Shoman and Omar Al Sharif
Based: Dubai
Sector: FinTech
Size: four team members
Stage: Intially bootstrapped but recently closed its first pre-seed round of $800,000
Investors: Wamda, VentureSouq, Beyond Capital and regional angel investors
Company%20profile
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The specs: 2018 Maxus T60
Price, base / as tested: Dh48,000
Engine: 2.4-litre four-cylinder
Power: 136hp @ 1,600rpm
Torque: 360Nm @ 1,600 rpm
Transmission: Five-speed manual
Fuel consumption, combined: 9.1L / 100km
The more serious side of specialty coffee
While the taste of beans and freshness of roast is paramount to the specialty coffee scene, so is sustainability and workers’ rights.
The bulk of genuine specialty coffee companies aim to improve on these elements in every stage of production via direct relationships with farmers. For instance, Mokha 1450 on Al Wasl Road strives to work predominantly with women-owned and -operated coffee organisations, including female farmers in the Sabree mountains of Yemen.
Because, as the boutique’s owner, Garfield Kerr, points out: “women represent over 90 per cent of the coffee value chain, but are woefully underrepresented in less than 10 per cent of ownership and management throughout the global coffee industry.”
One of the UAE’s largest suppliers of green (meaning not-yet-roasted) beans, Raw Coffee, is a founding member of the Partnership of Gender Equity, which aims to empower female coffee farmers and harvesters.
Also, globally, many companies have found the perfect way to recycle old coffee grounds: they create the perfect fertile soil in which to grow mushrooms.
BORDERLANDS
Starring: Cate Blanchett, Kevin Hart, Jamie Lee Curtis
Director: Eli Roth
Rating: 0/5
SPECS
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The specs
Engine: 2.0-litre 4-cylturbo
Transmission: seven-speed DSG automatic
Power: 242bhp
Torque: 370Nm
Price: Dh136,814
Tonight's Chat on The National
Tonight's Chat is a series of online conversations on The National. The series features a diverse range of celebrities, politicians and business leaders from around the Arab world.
Tonight’s Chat host Ricardo Karam is a renowned author and broadcaster who has previously interviewed Bill Gates, Carlos Ghosn, Andre Agassi and the late Zaha Hadid, among others.
Intellectually curious and thought-provoking, Tonight’s Chat moves the conversation forward.
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