Downbeat prospects for the United Arab Emirates' economy, combined with provisions as a result of debt trouble at two Saudi conglomerates is likely to dampen profits of the UAE's biggest banks for the remainder of 2009. Second quarter results of top lenders in Abu Dhabi and Dubai, the two wealthiest emirates of the seven that make up the UAE, have shown that provisions eroded an otherwise healthy income from traditional sources. Analysts say provisions for bad loans will remain a key issue in the following quarters in the UAE and other parts of the Arab side of the Gulf, the world's top oil exporting region. “Non-performing loans and provisioning have significantly increased during Q2 and will probably continue to do so in Q3 with a direct impact on banks' profitability,” Cyril Garbois, banking consultant for A.T. Kearney Middle East said. “They (UAE banks) are now facing the second wave of the crisis, linked to the deterioration of credit quality both on the retail and the corporate segments,” said Garbois. Regulators and bankers in the region are trying to address the fallout of the debt restructuring at Saad Group and Ahmad Hamad Algosaibi & Bros. In the UAE, the central bank has required banks to provide for 50 percent and 75 percent of exposure to the two groups, respectively, in the next two years. The UAE economy's is slowing down after the global financial crisis sent oil prices tumbling from a near $150 peak in mid-2008. It could even contract by the end of year, after booming for several years due to record oil prices. The downturn, as in the rest of the world, is triggering an increase in corporate and retail loan defaults. Ratings agencies have warned loan defaults could jump as much as four times because of falling property prices and the economic slowdown. Dubai's Emirates NBD, the region's biggest bank by assets, said on Monday that its second-quarter provisions were more than four-fold higher than the same period last year. The bank's Chief Financial Officer Sanjay Uppal has indicated that earnings would remain under pressure for the remainder of 2009 and that non-performing loans could peak to 2.5 percent in 2010. National Bank of Abu Dhabi, the country's largest lender by market value, on Tuesday said it took AED500 million ($136.1 million) in provisions in the first half of 2009 from AED145 million in the same period in 2008. The high level of provisioning at Emirates NBD and NBAD is part of a wider trend across the region, analysts said. “Given the current economic conditions, we expect banks across the sector to see asset quality issues in retail as well as corporate books,” banking analyst Janany Vamadeva at HC Brokerage said. According to investment bank Shuua Capital, Emirates NBD faces several challenges by the end of the year, including “continuing limited assets' growth” and “uncertainties regarding evolution of NPLs (and related provisions) by year-end.” In the second quarter, Emirates NBD took a AED1.15 billion hit in net impairment losses on financial assets. “We believe the combination of lower margins, limited scope for continued growth in funded and non-funded business lines and deteriorating economic conditions in Dubai - especially real estate, construction and retail loans - will continue to impact the bottom line (at Emirates NBD),” Deepak Tolani, banking analyst at Al Mal Capital said. Emirates NBD's results raise some concerns, as the bank is the first where provisioning has “jumped significantly above our expected trend,” EFG Hermes analysts said. Emirates NBD was the first bank to substantially break the 1 percent annualized provisioning rate.
