UAE banks' weakening credit quality may drive loan restructuring

Last updated on May 4, 2021 at 02.44 pm

Eleven UAE national banks have reported around Dh7.74 billion in first quarter net profit, a growth of 9.6 per cent over the same period last year, amid warning by analysts of deteriorating credit quality for major banks.

Weakening credit quality, according to analysts, is likely to drive loan restructuring at large-to-mid-sized accounts, with smaller businesses and retail loans facing impairment risk.

“That suggests the top 10 UAE banks’ nonperforming loans could increase by at least 2-3 percentage points. Yet Covid-19’s asset-quality effect won’t become clear until the Targeted Economic Support Scheme (TESS) deferred program phases out in 1H ,” wrote Edmond Christou, Bloomberg Intelligence industry analyst.

The UAE Central Bank has extended until mid-2022 some stimulus measures introduced last year to mitigate the impact of the coronavirus crisis on the economy. Banks will continue to be eligible to access a collateralised Dh50 billion zero-cost liquidity facility until June 30 2022.

The UAE’s largest bank, First Abu Dhabi Bank (FAB), has moved more loans to higher grades, Emirates NBD has raised provision coverage more than Abu Dhabi Commercial Bank for deferred exposure — limiting downside — so ADCB may strengthen coverage too. “Lenders with lower affected-sector exposure, higher provisions, better-quality deferred loans and stronger capital have better prospects, with Emirates NBD leading and Dubai Islamic Bank lagging,” said Christou.

According to data issued by the top 10 banks, six ADX-listed banks booked around Dh4 billion in profits during the first three months of the year, compared to Dh2.967 billion over the same period in 2020.

FAB topped the list with around Dh2.475 billion in profit, an increase of 2.8 per cent from the same period last year. ADCB came second with Dh1.12 billion in net profit; followed by Sharjah Islamic Bank, Dh164 million; and then RAK Bank and NBQ, Dh43 million each.

Emirates NBD came first with net profits worth Dh2.32 billion during the same period; followed by Dubai Islamic Bank with Dh846 million; Commercial Bank of Dubai.

According to Bloomberg analysis, the deferred-loan programme (involving 16 per cent of top-10 UAE banks’ loans) ends in June, so borrowers with weak cash flow may face downgrades or loans migrating into lower-rated categories.

“By extending loan tenures and making payments more affordable, lenders may restructure exposure to reflect new cash-flow capacity for impacted sectors. Group 1 clients facing temporary stress from Covid-19 are particularly affected, with exposure largely under Stage 1 performing loans.”

“Our scenario model shows 20 per cent of the top 10 UAE banks’ Group 1 deferred credit moving into Stage 2 under-watch loans, with 10 per cent of Group 1 deemed to be impaired, and 30 per cent of high-risk Group 2 loans become bad loans. NPLs could thus rise at least 2-3 percentage points, but cost of risk (provisioning) of about 150 bps may restore coverage,” Bloomberg analysis shows.

The real-estate sector loan exposure of banks was stable at 21 per cent of credit risk-weighted assets (RWA) in 2020, with some lenders de-risking while others gained share. Exposure to Covid-19-affected sector — service, hospitality and trade — was cut to 14 per cent of 2020’s RWA vs. 16 per cent in 2019. “Banks with lower sector exposure, higher provisions, better-quality deferred loans and stronger capital vs. industry peers are positioned to capture upside, given downside is limited, in our view. Emirates NBD beats on these metrics vs. lowest-ranked DIB.”

The analysis noted that banks with soft cash-provision coverage appear comfortable in terms of collateral held against loans. “Yet collateral is largely real estate, so a property-market rebound is key to avoiding second and third-order effects. We thus continue to view banks with higher cash coverage more favourably.”


Issac John Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.