DUBAI - UAE banks continue to be nervous about extending credit to the private sector due to fears around potential future losses and write-downs they may face, SHUAA Capital, the leading financial services institution in the GCC, said Monday on its “UAE Banks Put To The Test” report.
However, the report’s results suggest that the UAE banking sector overall has the ability to withstand potential losses associated with further deterioration in asset quality, largely due to the authorities’ efforts to strengthen banks’ balance sheets since the onset of the financial crisis.
While the banks on average are well capitalized, SHUAA’s stress tests show that several banks would need additional capital injections to meet the central bank’s regulatory requirements in all given scenarios. However, SHUAA believes that UAE authorities could provide the required level of recapitalization to these banks if necessary, particularly as the government has already stepped in to provide financial support to some UAE banks at the height of the financial crisis.
In the context of international experience, the report considers that additional measures could be taken by the authorities to strengthen UAE banks’ balance sheets, restore confidence and encourage banks to resume lending to households and businesses. These measures include replacing high-risk assets in the banks’ balance sheets with low risk government securities, stricter provisioning requirements, and providing side measures to encourage bank lending to sectors and businesses with long-term strategic importance.
The report recommends that UAE authorities implement broad structural and economic reform to encourage private sector and foreign investment in the UAE, which would yield greater long-term benefits. Structural reforms, including greater transparency, improved corporate governance and a stronger regulatory framework in the financial sector and within the broader economy would contribute to greater investor confidence and - ultimately - improved access to funding at better terms, both for banks and corporate entities at-large. In a post-crisis situation where commercial banks are increasingly risk averse, the ability to attract long-term funding at good rates is a key element for sustainable credit and economic growth.
The report comes at a time when the worst of the recession appears to be over but local banks remain risk averse and reluctant to extend credit to the private sector due to concerns around future losses and write downs. SHUAA has estimated the extent of those losses and write downs and the ability of UAE banks to absorb them should they materialize. Ultimately, the report concludes that the local banking sector as a whole is sufficiently capitalized to withstand further deterioration in asset quality.
The report stress tested eight local banks: Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Mashreqbank, First Gulf Bank, Dubai Islamic Bank, Union National Bank and Commercial Bank of Dubai. The report focuses on what SHUAA considers to be the banks’ riskiest assets on their balance sheets; these include real estate and personal loans extended in 2008, potential losses associated with banks’ exposure to Saad, Al Gosaibi and Dubai World, and “renegotiated loans” which appeared on most banks’ FY09 financials. Moreover, the report takes into account the fact that Dubai-based banks incur a higher risk associated with their real estate exposure than Abu-Dhabi based lenders. - QJM