UAE banks are on the verge of ending a massive drive they kicked off in the wake of the 2008 global fiscal distress to build up provisions against bad loans and this will boost their income in 2012, according to a regional report.
The 45-page report by Kuwaiti-based Global Investment House (GIH) covered the country’s five largest banks—Dubai-based Emirates NBD (ENBD), the Middle East’s largest by assets, and four government-controlled banks based in Abu Dhabi-- National Bank of Abu Dhabi (NBAD), Abu Dhabi Commercial Bank (ADCB), First Gulf Bank (FGB) and Union National Bank (UNB).
The report showed the combined non-performing loans (NPLs) of the five banks had slowed down considerably as they grew by four per cent year-on-year in 2011, assisted by what it described as de-recognition of exposures that were restructured and categorized as performing.
“With the worst seemingly over, NPL formation is expected to take a breather. Our discussions with the banks have led us to believe that banks’ NPLs are nearing the end of the current cycle,” GIH said/ “Yet, NPL ratio is expected to touch peak in 2012 for most banks and in 2013 for others, NPL formation will decelerate significantly for all.”
It said banks appear to be at ease regarding their consumer portfolio and credit issues with which have already stabilized.
“While the corporate segment will continue to be the impairment churner, banks do not expect big names like Dubai World and Dubai Holding to be the source.”
The report showed ENBD made the largest provisions through 2011, adding nearly Dh9.28 billion to push total provisions to Dh29.7 billion at the end of the year. NBAD came second, allocating Dh1.59 billion to Dh4.83 billion.
It showed ADCB’s provisions plunged by around Dh8.2 billion from a total Dh14.2 billion at the start of 2011 to Dhsix billion at the end of the year. The report said around Dh6.7 billion was transferred to performing loans while Dh2.4 billion was written off. It said new NPLs formed through the year stood at Dh984 million.
Provisions by FGB dropped by Dh265 million from Dh4.56 billion to Dh4.3 billion while those by UNB fell by Dh306 million from Dh2.49 billion to Dh2.18 billion.
“After a tough year in 2011, aggregate profits of the banks covered in the report rose 30 per cent YoY due to one-off gains but remained stagnant otherwise. The current year is expected to bear sweeter fruit, with one-off adjusted profits rising 22 per cent,” GIH said. Bottom-line growth is anticipated to be driven by drop in provisions, which are expected to shrink by 13 per cent.”
It said those banks with the exception of FGB and UNB already meet regulations set by the Central Bank regarding collective provisions which needs to be maintained at 1.5 per cent of credit risk weighted assets (CRWA) by 2014.
ENBD, however, has over-provided for the same, with its ratio climbing to 2.5 per cent. “As per our calculations, assuming that our credit growth expectations are not exceeded, that composition of loans does not vary vastly and that ENBD does not opt for a reversal, the bank has enough collective provisions to last at least till the end of our forecast horizon,” it said.
“Even if ENBD does not take any additional collective provisions, we do not see its ratio going below 1.8 per cent by 2015.”
GIH’s forecast showed ENBD’s net profits would reach around Dh2.27 billion while the earnings were estimated at Dhfour billion by NBAD, Dh3.92 billion by FGB, Dh2.05 billion by ADCB and Dh1.57 billion by UNB.