Thursday, July 8, 2010

The Curious Case of UAE Banks

Roula Khalaf at the Financial Times:
What’s going on at the banks in the United Arab Emirates? It is an open secret that the deterioration in their asset quality is worse than suggested by the size of problem loans, which credit rating agency Moody’s puts at 4.9 per cent of total loans at the end of last year.
Some accounting magic keeps the amount of reported troubled credits lower than actual.  Renegotiation of troubled credits another way that numbers are managed.   More distress on the way in terms of the full knock-on effects of the crisis.  

But fundamental support for the banking system posited.

No doubt.  

But weakness in the banks will lead to lower loan growth.  Those loans granted will have stricter terms.  And thus there will be an economic price to pay.

6 comments:

Dokemion said...
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Laocowboy2 said...

In the past (and probably now) UAE banks tended to do their major loan classification exercise at year end with (perhaps) a less thorough classification review at the end of H1. As we are only in July, we will not have seen what the H1 numbers say. Added to that many banks tend to make provisions based on the unsecured portion of outstandings. Many of the dud loans will have "security" albeit that both valuations and marketability of same are uncertain.

As to banks making credit harder to obtain, no bad thing until some of them learn how to lend more responsibly than we have seen in the past!

Abu 'Arqala said...

Dokemion

Thanks for your post, but we don't "do" advertising here.

Abu 'Arqala said...

Laocowboy2

Sadly, educating bankers to avoid duff loans is highly similar to the practice of students cramming for exams. Both manage to retain the information for only a very short period.

The problem for bankers is that the "exam" keeps occurring over and over but the cramming is only done when the loans go really bad.

Laocowboy2 said...

In my early banking days long ago I was taught that real estate crises recurred roughly every twenty-five to thirty years. Asking why I was told "because that is roughly five years after the last middle lending manager who was around from the last real estate crisis has retired".

People tended to serve most if not all their career at a single institution in those days. With today's market and with five years being a long time in a job, the institutional memory period is much lower.

Abu 'Arqala said...

Laocowboy2

Very valid observation.

As well, one might add the change in many banks' compensation schemes where revenue growth is given a very high priority.