Banks are facing a bleak start to the year, with increased provisions for bad loans and restructurings predicted to take a toll on earnings for the final three months of last year.
Analysts expressed concern that the extent of provisions for debts held by Dubai World, Dubai Holding and other government-related entities - still undeclared by many banks - could have a big impact on profitability and creditworthiness.
In November, provisions increased by 4.04 per cent from the previous month to Dh41.2 billion (US$11.21bn), a record high for the year, according to data released by the Central Bank.
On an annual basis, provisions rose 28.75 per cent as troubles in the property sector ate into asset quality.
Provisions are expected to have shot up last month as new Central Bank regulations took hold, causing banks to put aside more money for non-performing loans, which now must be declared after a shorter period in arrears.
"We've got all the Dubai banks' individual ratings, which are stand-alone ratings, on a negative watch - pending the publishing of the year's results to see what provisions they will have to take," said Mahin Dissanayake, a financial analyst at Fitch Ratings.
Bank deposits shrank in November, by 0.4 per cent from the previous month, at a time when loan-to-deposit ratios are already high.
The Central Bank regulatory changes considered most likely to affect bank profits include the policy that banks will have to classify loans as being in default - and make provisions accordingly - after 90 days of delinquency, instead of the current six months.
Banks will be required to make general provisions worth 1.5 per cent of their total risk-weighted assets, and from this month provision for a greater proportion of their exposure to loans to the Saad Group and Ahmad Hamad Algosaibi & Brothers, two Saudi conglomerates that defaulted on loans in 2009.
The Central Bank hopes the changes to non-performing loan classification will bring the UAE into line with international standards on non-performing loans. "This review will also serve as a catalyst in depicting a truly realistic financial position of banks and other financial institutions," the Central Bank said in a circular announcing the changes.
Raj Madha, a financial analyst at Rasmala Investment Bank, said banks that did not already classify loans as non-performing after 90 days would see an immediate rise in provisions of about 20 per cent under the new regulations.
For the banking system as a whole, he said it would "probably be [an increase of] less than 10 per cent", adding that the changes would not appear until next month's Central Bank figures were released.
Mr Madha said he expected many banks to record new provisions due to weak performances by some companies towards the end of last year.
"The fourth quarter has been marked by some deterioration, specifically among Dubai corporates," he said.
John Sfakianakis, the chief economist at Banque Saudi Fransi, said banks' problems would continue as long as the property market remained weak."Consumers aren't able to fill the gap, and the private sector isn't really picking up because they were witnessing huge amounts of growth due to the property sector," he said.
ghunter@thenational.ae