The second quarter results of the UAE banks suggest that even after going through 12 consecutive quarters of balance sheet repair many are still struggling with their non-performing loans (NPLs) and mounting impairment provisions.
Thanks to the aggressive deleveraging and cautious lending practices, a number of banks have seen a decline in their provisions in the second quarter of 2011, but at slower pace.
Margins faced an additional squeeze from new central bank regulations on retail loans and fees charged on banking services from May 1 this year.
Loan loss provisions of Emirates NBD, the biggest bank by assets, fell 18 per cent in the second quarter of this year compared to the same quarter last year and on a quarter on quarter basis fell 28 per cent. While Abu Dhabi Commercial Bank reported a 28 per cent decline in provisions in the last quarter year on year, Mashreq and Commercial Bank of Dubai reported a 29 per cent and 9 per cent decline in bad loan provisions in the same period.
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Banking analysts and rating agencies see the decline in provisions as a positive sign of improving balance sheets. However, they say the NPLs in the UAE have not yet peaked and many banks in the country are likely to see a further increase in provisions but at a lower pace because of the corporate restructuring and debt hanging over many companies and government related entities (GREs).
Rating agency Moody's expect the NPL ratio of UAE banks to peak above 10 per cent this year from 8.3 per cent in 2010. "The Dubai Holding $10 billion [Dh36.7 billion] debt restructuring will be one significant contributor to this year's NPL levels," said Nicolas Charnay, Associate Analyst with Moody's.
Some analysts say the bad debt ratios of the UAE's banking system may have already surpassed double digit levels if all the reported NPLs are taken along with the restructured loans.
"The amount of reported restructured loans is especially significant in the UAE and if we add this figure to reported NPLs, the ratio reaches into the double digits for the country's banking system," said Goeksenin Karagoez, a credit analyst with Standard and Poor's.
The second quarter results of some of the leading banks confirm that there is more to come in terms of bad loan recognition. National Bank of Abu Dhabi, the second largest bank in the UAE by assets reported a 39 per cent increase in provisions year on year in the first quarter. Abu Dhabi headquartered Union National Bank (UNB) posted a 21 per cent increase in provisions in the same period.
NBAD's non-performing loans increased to Dh4.17 billion, accounting for 2.65 per cent of its loan book at the close of the first half of this year.