Dubai: Tighter banking on the cards

The banking industry looks set for a period of consolidation and belt tightening, with many of Dubai’s analysts predicting an easing of profits and an increase in non-performing loans (NPLs) for the near term. Though mergers and restructuring by some local lenders is expected to produce a leaner sector, it should also become stronger and thus better able to meet the demands of the rapidly changing financial landscape.

In early November, international ratings agency Moody’s said it was maintaining its negative outlook for the UAE’s banking system, with the coming 12 to 18 months set to be a difficult period for the banking sector in Dubai and the other emirates. The agency said the negative outlook was driven by the legacy asset quality challenges related to the ongoing restructuring of some large government-related borrowers, an issue it said could impact Dubai lenders in particular.

According to Khalid Howladar, the vice-president and senior credit officer at Moody’s Dubai office, the restructuring of Dubai World’s $25bn corporate debt had been “a critical step forward for banks’ asset quality and the economy”, though with other domestic government-related issuers (GRI) due to refinance their loans during 2012, there could be some pressure on lenders’ NPL portfolios.

Large distressed GRI exposures will continue to push up system-wide NPLs, which are likely to peak at around 13-15% in Dubai next year, the report said.

However, as banks had increased their capital over the past two years, there was little concern that the lenders would not be able to cope with this pressure, Howladar said.

“Our scenario analysis of system capital levels indicates that rated UAE banks are adequately positioned to absorb the credit losses under both our central and adverse case scenarios,” Howladar said in the report.

Equally positive was Bank of America Merrill Lynch economist Jean-Michel Saliba, who told the Gulf News in early November that local lenders should have sufficient resources to deal with refinancing requirements.

“Our bank equity research team believes the domestic banking sector could handle 2012 loan refinancing should international banks not participate in the roll-over. But it could push up NPLs of the banking sector,” Saliba said.

There are increasing indications that international banks may not play a major part in the roll over of these debts, given the growing uncertainty coming out of Europe, according to Nasser Saidi, the chief economist of the Dubai International Financial Centre.

“We can expect European banks to deleverage, reducing their international exposure and credit lines,” Saidi told Bloomberg in mid-November.

It will not just be European banks looking to reduce their debt levels, as it is likely there would be a process of restructuring and deleveraging, or only limited loan growth for leading banks in Dubai in 2012, according to Timucin Engin, the associate director of rating and analytical, financial services at Standard & Poor’s.

“This is because these institutions are largely focusing on managing their existing exposures, owing to their pronounced asset quality issues,” Engin said on November 21.

This process is already under way, with a number of large and medium-sized banks in Dubai working to improve their structure and operational performance as they move into 2012.

In late November, Dubai-based investment company Shuaa Capital announced it would be making a number of staff redundant, after shedding almost 40 positions in May – around 10% of its workforce – as part of a cost-cutting and restructuring programme. The move is in line with what the bank’s directors said was a “strategic plan to shift away from retail brokerage and focus predominantly on serving institutional clients and high-net worth individuals”.

It has also been widely reported in local media that Emirates NBD, a regional banking leader, is planning to implement an operational merger of two lenders it owns, Dubai Bank and Emirates Islamic Bank (EIB). Emirates NBD took control of Dubai Bank in October at the behest of the government, after it experienced losses and was acquired by the state in May.

When Dubai Bank was transferred to Emirates NBD in mid-October, Henry Azzam, the chief executive officer of Deutsche Bank in the Middle East and North Africa, told local media that the move made sound business sense.

“The takeover surely constitutes a factor of reassurance for depositors and at the same time will bolster Dubai Bank and the UAE banking sector in general,” said Azzam. “It will also expand Emirates NBD’s market share in Islamic banking services.”

Further consolidation by Emirates NBD would seem to be a logical step, removing any overlap of operations between the two subsidiaries and improving cost efficiencies.

Though 2012 may be a tough year for many Dubai banks, the continued process of renewal and restructuring, initiated after the global financial crisis of 2008, should see local lenders even better prepared to cope with future external shocks and to capitalise on opportunities as they emerge.

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