Retail Loan Exposure and NPLs: Emirates NBD Bank

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Almost all of the media coverage of loan problems in the GCC is focused on the commercial market. Scarcely a day goes by without an article on AlGosaibi, Saad, TIBC, Awal, Investment Dar or Dubai World.  It's not just the paid media but also blogs like this.  There's a natural fascination. The story of the average Joe or Abdullah is harder to follow.  The amounts are smaller.  Therefore, the drama seems less.

The major corporates give us exciting amounts with larger than life villains, once proud tycoons now humbled, disconcerted and angry bankers.  The plot lines and therefore the excuses are even more elaborate.  One doesn't excuse a mistake on granting a credit card by recounting the legend of "Big Foot" and the "implicit guarantee".  The BBA doesn't write a letter to the Shaykh to complain that Abdullah is behind on his personal loan.  Sadly, financial journals do not thunder about the irresponsibility of Sanjay in Dubai who skipped a payment or two on his car loan.  Or call on the Shaykh up the road for a bailout.

Yet, all these small loans can add up to one big headache. And the usual pattern of transmission of financial distress is that large commercial firms are hit first with the shockwaves being transmitted to smaller commercial firms and then the public.  

If this pattern repeats itself,  Gulf banks are in for a second wave of NPLs.  What's perhaps more to the point is that since much of the consumer lending in the GCC was done with manifestly weak underwriting standards, this wave may be quite high.  Since I've posted before on this topic, I think I'll just hum the first few bars. You already know this song.

Yesterday again I posted a similar comment.

Today let's look at some data.

60 second summary:   EmiratesNBD's retail NPLs have jumped to 11% of the retail portfolio from approximately half that the year before.

While EmiratesNBD has yet to release its 2009 financials (pending CB UAE approval) it has released a 26 page presentation on 2009.  Though my intent is to focus on retail loans, I will discuss commercial and "Islamic" loans as well to provide a context.

The key pages are 13 and 14.

Slide 13 Asset Quality Loans Receivables and Islamic Financing 

Absolute amounts of NPLs:

1. Aggregate NPLs have increased from AED1.976 billion to AED5.041 billion (155%).
2. Corporate NPLs from AED0.464 billion to AED1.674 billion (261%)
3. Retail NPLs from AED1.305 billion to AED2.685 billion (106%). Note that the retail portfolio is 20% of the corporate portfolio.  Yet, the absolute NPL increase here is larger than the increase in the corporate portfolio NPLs.  That is both a distressing sign and a sign of distress to come.
4. "Islamic" NPLs from AED0.207 billion to AED0.682 billion (229%).

Relative percentages NPLs/Portfolio 2009 and (2008):

1. Corporate 1.3% (0.37%)  This level seems low given the existing level of problems.  I'd guess that 5.0% might be a more realistic absolute minimum for the corporate sector.   And that is likely to be low  unless there are cosmetic "extend and pretend" adjustments or a financial miracle.
2. Retail 11% (5.3%)  - A very large jump.  Admittedly, there is some "noise" here.  During 2009 ENBD made a long overdue switch in definition of a retail NPL from an unrealistic/unbelievable 180 days past due to a more conventional 90 days.  Regardless of how much of the year on year increase is due to the accounting change, the key point is that 11% of the retail loan portfolio is non performing.
3. Islamic 3% (0.94%)

Note 2008 percentages are estimated using 2009 loan data and relative percentages as these do not appear to have materially changed from 2008.  Thus, this should give a rough approximation of the change.

Slide 14 Asset Quality Retail and Corporate Loans and Receivables

Corporate and Sovereigns

1. 96% of exposure is to UAE to "top tier" names with whom the Bank has long standing relationships.  Not sure what that means in terms of creditworthiness measured by the old fashioned yardstick of ability to pay.  I rather doubt that ENBD has a lot of exposure in Abu Dhabi.  Concentrations to obligor groups (Dubai Inc and Dubai Government for example) may be problematical.
2. Loan renegotiations in 2009 did not involve any sacrifice of interest or principal.  Apparently, only extension of payment terms.   Sometimes this is all that is required.   A bit of breathing room for the borrower and then one gets repaid.  Other times it is the first step in "extend and pretend" scenario that turns out less rosy in the end.
3. Real estate "selective financing".  With the existing exposure to Dubai World, this must refer to a  break from past underwriting standards.  Financing  is now restricted to Dubai and Abu Dhabi.  Presumably, with limits suitably scaled for risk.  
4. 55% of the real estate portfolio is due for repayment in next three years.  Given the depressed state of the real estate market, this may not be a particularly robust season for loan repayments.

 Retail Loans

1. Delinquencies are stabilizing across categories and only trending downwards on 33% of portfolio (personal loans).  While it's good they are not increasing, the issue is whether they are stabilizing at high levels.  I suspect this is the case as typically distress in the consumer sector lags that in the corporate sector.  If a business recovery is protracted in Dubai (my  view), then  consumer difficulties are likely to persist and may not yet have hit bottom.  If so, the retail NPLs will continue to increase in absolute and percentage terms.
2. 44% of value of retail loans to UAE nationals and greater than 60% to government employees.  It would be interesting to see the breakdown of NPLs between these categories and "all other" to see if the problem is concentrated in one customer segment.  If government employees (which presumably includes almost all of the nationals) are having financial problems, that would be a sign of very wide distress.
3. The bank is controlling unutilized limits on credit cards.  Not sure I follow this.  Isn't the point of a credit card to have an unused limit?  Is this a reduction in limits not frequently used?  That is,  underutilized limits?  If so, then it would seem the bank is expecting more consumer distress as it is trying to prevent cash strapped consumers from using their credit cards as "last resort" financing.   Though to be fair bankers are usually pretty good at figuring out they should close the corral gate after the horses have bolted.  So it may be a bit of retroactive underwriting - which usually hits largely the good customers.  It would also be interesting to see how many cards were either max-ed out or nearly so.  That could be a sign of more potential bad loans.
4. Like firms who "downsize" instead of 'fire" workers, ENBD has "de-grown" its car loan portfolio.  A good de-offensive move.
5. Mortgages have an average 75% loan to original value.  With the decline real estate prices, it would seem highly likely there are a lot of "under water" mortgages on the books.  Offsetting this ENBD claims that  90% of its customers are "high income"  though I wonder if US$82,000 or thereabouts is really high income in high cost Dubai.  Expect more mortgage problems.

  Other Information

1. Slide 10 with an analysis of the net interest margin.  An 89 basis increase in loan spreads (primarily corporate) and a 25 basis point increase in treasury profits (I'm guessing primarily from loan  benchmark pricing definitions and some gapping) offset partially by an increased cost of funding -  roughly 50 basis points. 
2. Slide 16 with some funding data.  Debt maturity profile: over the next three years the bank has to refinance 79% of its AED24.1 billion debt with 30% due this year.  Offsetting that the bank states it has AED18.5 billion in unused liquidity facilities.
3. Slide 36 has a quarterly review of 2008 and 2009 with asset quality credit metrics. Here you can track the quarterly movements.

There's probably no ultimate credit worry here.  The UAE is not going to let a bank the size or importance of ENBD fail (Oh, did I just glimpse the shadow of an "implicit guarantee"?  Perhaps just an imagined "keepwell").  Probably the major concern is stock performance.  And for term lenders, credit re-rating risk.  It would be unfortunate to prematurely lock in a margin which suddenly becomes too low for the risk.