UAE lenders’ bad debts start to weigh on financial results

UAE banks are starting to feel the pain from tumbling oil prices and a slowing economy.

While there have been indications of lower loan growth and rising defaults amid job cuts and reports of small businesses going bankrupt, the fourth-quarter results are starting to show the extent of the bad debt that has accumulated.

Sharjah-based United Arab Bank (UAB) yesterday said it booked a loss of Dh166 million in 2015 as bad debts piled up after years of risky lending to SMEs unravelled in the economic downturn. Union National Bank and National Bank of Fujairah also reported earnings showing sharp drops in quarterly profit as the amounts set aside for bad debt jumped.


UAB said its losses came as it booked provision for credit losses, or money set aside for bad loans, of Dh887m in 2015 compared to provisions of Dh374m in 2014, when the bank recorded a profit of Dh605.4m. UAB did not give a breakdown of the fourth-quarter earnings and the bank did not immediately respond for a request for its profitability in the last three months of 2015.

“Our results were materially affected by the significant effect of provisions taken in the second half of 2015 following defaults predominantly in the SME segment,” said Samer Tamimi, UAB’s acting chief executive. “To improve financial stability, our first course of action was to deleverage from these higher-risk portfolios.”

Cracks in UAB’s operations appeared during the third quarter of last year, when the bank lost Dh272.6m compared to a profit of Dh169.2m in the same quarter of 2014.

Before that loss, the bank had been on a roll in the boom years that began in 2012. Its net income grew 9.6 per cent in 2014 to Dh605m from Dh552m in 2013 at a time when the bank benefited from record low interest rates that encouraged individuals and companies to take out loans to fund everything from cars to homes as well as corporate expansion.

“UAB has deleveraged in 2015, after several years of substantial growth,” said Jaap Meijer, the head of financial services research at the investment bank Arqaam Capital in Dubai. ­“UAB is the most affected of all UAE banks, with what appears to be the least prudent lending standards over the last few years.”

But UAB’s woes are not unique. While so far the cracks in bank earnings have not been pronounced, there are other signs, such as the increasing number of job cuts that point to a rough road ahead in banking.

In the past several months, banks including FGB, RAKBank, HSBC and Standard Chartered, have all shed jobs in anticipation of lower growth.

As a result, Mr Meijer said that, overall, he expects earnings of banks to be flat in 2015 as provisions increase amid worsening asset quality.

He said he expected loan growth to range from 4 to 5 per cent in 2016 versus about 8 per cent last year, in line with other analysts’ projections.

Union National Bank said its profit in the fourth quarter sagged 55 per cent to Dh195m from Dh436m in the same per­iod the previous year, as impairment charges on assets increased 44 per cent to Dh395m.

National Bank of Fujairah said its fourth-quarter income dropped 23 per cent as provisions more than doubled to Dh76m. Net income slipped to Dh105m from Dh136m in the same period last year.

mkassem@thenational.ae

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