UAE banks including National Bank of Abu Dhabi are gearing up to comply with Central Bank caps on their loan exposure to the Government and to companies linked to it. Delores Johnson / The National
UAE banks including National Bank of Abu Dhabi are gearing up to comply with Central Bank caps on their loan exposure to the Government and to companies linked to it. Delores Johnson / The National

GCC banks can beat their chests, but must be wary



Executives at major GCC banks have every right to feel slightly smug as European lenders grapple with the euro-zone crisis, downgrades and rate-fixing scandals.

Despite a bailout of up to €100 billion (Dh465.11bn) for Spain's financial system, the ratings agency Moody's Investors Service last week downgraded most of the country's banks.

Only days earlier, it cut the ratings on 15 global banks, including Barclays, HSBC and Royal Bank of Scotland in the United Kingdom, along with Bank of America and Citigroup in the United States.

To complete a miserable week for Europe's key lenders, David Cameron, the British prime minister, ordered a review into how the interbank lending rates work after Barclays was caught manipulating them.

In comparison, banks in the Arabian Gulf are sailing through calmer waters. Bank executives in the region will be on the whole encouraged by performances at the halfway stage of the year.

"Generally, GCC banks are in a sounder position than European banks," says Jaap Meijer, the head of financial research at Arqaam Capital. "Capital and liquidity positions are much stronger and growth earnings are much better."

Yet it was not long ago that GCC banks were fighting their own fires. A more than US$23 billion (Dh84.48bn) debt restructuring at the conglomerate Dubai World as well as defaults by the Saudi groups Saad and AlGosaibiwere the main sources of pain after the global financial crisis of 2009.

But a successful rejigging of Dubai World's debt helped to pave the way for other moves to go smoothly. A sizeable amount of the $15bn of Dubai's sovereign and government debt maturing this year has already either been rescheduled or paid off.

Capital adequacy ratios, or the amount banks have compared with their assets - a key barometer for the industry's health - have crept up. The 26 Gulf banks covered by Standard & Poor's (S&P) have risk-adjusted capital ratios of 12 to 13 per cent, according to the ratings agency. That is about 5 percentage points higher than the 100 biggest global banks assessed by S&P, making them more attractive to investors.

Deposit growth in the GCC is also robust, swelling by 10 to 15 per cent since the start of the year.

Yet within the region differences exist. Banks in Saudi Arabia, Qatar and Kuwait are considered by analysts to be on the strongest footing. Those in the UAE and Oman are generally less well capitalised, but still considered to have a strong base.

Emirates NBD, Abu Dhabi Islamic Bank, Abu Dhabi Commercial Bank and Dubai Investment Bank may have to cut dividends, reduce growth or raise cash to address a shortfall in core tier 1 equity, according to a recent report by Arqaam Capital.

But there are other reasons GCC banks should be upbeat.

Tentative signs of a recovery in the UAE property market have given the country's lenders cause for optimism. Banks built up bad debts over the past three years as a result of a rising tide of defaults on mortgages and other loans linked to a weak property market.

Evidence of an end to the slide in property prices is giving banks the confidence to slowly scale back the mountain of provisions they have built up since 2009. The provisioning was designed to shield the banks from bad loans.

Lower provisioning expenses helped banking profits in the GCC rise by 18 per cent in the first quarter of the year compared with the same period last year, a recent report by the Kuwaiti investment firm Global Investment House highlighted.

The positive trend is forecast to continue.

"Profitability is expected to improve generally on the back of reduced provisioning compared with 2009 to 2010," says Nitish Bhojnagarwala, an analyst in Moody's financial institutions group in Dubai.

But it is not all plain sailing for GCC banks. Although few of the region's lenders have direct exposure to the euro-zone turmoil, the crisis playing out in Europe still poses an indirect risk.

"Any [negative] changes to global growth expectations and confidence will likely depress oil prices," says Mr Bhojnagarwala. "While sovereign wealth funds and low debt-to-GDP levels can help provide a buffer, any drop in prices is very keenly felt, given the recent escalation in spending by all the Gulf countries."

Fears over such a scenario have already hit the gains that bank shares made during the first quarter of the year.

The price of Brent crude recovered to $94 a barrel on Friday, but the European benchmark still had its worst quarter since 2008.

Regulation could be another potential spanner in the works. UAE banks are gearing up to comply with Central Bank caps on their loan exposure to the Government and to companies linked to it. The new rules come into force on September 30.

"Our preliminary calculations suggest that Emirates NBD and NBAD's [National Bank of Abu Dhabi] lending exposures are already above this cap," says Chiradeep Ghosh, a senior analyst at Securities & Investment Company in Bahrain. "However, we believe that these new regulations will have a stronger impact on future lending than on existing loans and expect some leeway from the regulator."

The regulations are likely to have a drag on lending as the government sector has taken up a large chunk of banks' credit growth in recent years. No such rules are yet in the pipeline elsewhere in the GCC.

Credit growth in the UAE this year is already forecast to be below 10 per cent, lagging behind the expected double-digit expansion in Saudi Arabia and Qatar. But most analysts agree sound regulations can help to cut the chances of GCC banks facing a debt crisis similar to the one with which their peers in the euro zone are getting to grips.

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