Analyst says banks unlikely to book full exposure as NPLs
DUBAI: United Arab Emirates banks would likely record 10 percent of their exposure to Dubai’s debt-laden conglomerates as non-performing loans (NPLs), while growth is expected to resume only in 2011, a Credit Suisse executive said.
Mohamad Hawa, head of MENA equity strategy at Credit Suisse, said the remaining exposure would likely be booked as lower interest income and considered a restructuring of debt rather than non-performing loans.
“Although you can argue that the economic value of the restructured debt is around 60-70 percent on the dollar, we don’t really think that banks have to or will take an effective rate cut of 30-40 percent,” he told on the sidelines of a research roundtable on Monday. Hawa also said the non-performing loan ratio for UAE banks stood at about 3 percent, while in a country like Kuwait, where the banking sector is similar to the UAE in terms of exposure to real estate and investment firms, the ratio was 12 percent. That signals further worries for UAE banks, according to the executive.
Concerns about the overall debt burden of Dubai’s state-linked companies mounted after Dubai announced a standstill on repaying $26 billion in debt as it restructured conglomerate Dubai World. It unveiled a $9.5 billion rescue plan for the firm in March and is currently in talks with other lenders for approving the plan..
Lenders will wait up to eight years to get their $14.4 billion back but have avoided a “haircut” on their principal under the terms of the deal, which offers 1 percent cash interest and an extra 1.5-2.5 percent per annum rolled up into a lump sum payment. Aside from Dubai World, banks in the United Arab Emirates were hit as a result of the global economic crisis, as provisions against bad debt hurt profits and curtailed lending activity. Few banks have detailed their exposure but analysts have pegged the total amount of exposure to be between $10 billion and $15 billion for the UAE banking sector.
Growth to lag in 2010: Shrinking margins and subdued loan growth will hamper growth opportunities for Gulf Arab banks in 2010 and a recovery in the sector is expected only next year, Hawa said.
Banks in the region will also be impacted as non-performing loans are expected to peak in the year and valuations were not “cheap” compared with other global banks. “All in all what we are saying is that in 2010 we will see that margins are going down, loan growth is subdued and credit costs are high,” Hawa told reporters. “2011 is the growth story when banks are expected to turn in a good performance,” he added. The executive said a recovery in the banking industry was expected in 2011 as potential interest rate increases by the United States were expected to improve margins and the rate of non-performing loans was expected to fall.
Since most Gulf currencies are pegged to the dollar, an interest rate increase in the United States would help banks in the region, which are mainly deposit-funded, he said. Hawa said he preferred Abu Dhabi-based banks like National Bank of Abu Dhabi and First Gulf Bank as they had low exposure to Dubai debt and high capital reserves.