UAE banks not out of woods yet
The bankers populating the Dubai International Financial Centre are a rather more nervous bunch as they enter the third year since the emirate's credit bubble burst. The bravado of boom time Dubai has vanished, replaced by a sober sense of a slow recovery.
International banks have laid off hundreds of thousands of employees globally, leaving the UAE less of a priority. And lenders in the country are constrained in their ability to provide loans by bad debts that are expected to persist for years.
Signs are emerging of a recovery, albeit a tentative one, in banking,says Jonathan Morris, the UAE chief executive of Standard Chartered.
"I genuinely think lessons have been learnt from the crisis," he says. "As a result of firmness in the job market, we continue to see improvement … House prices are firming up as well. Most banks are seeing retail loan books improving."
New Central Bank regulations limiting retail lending and increasing capital requirements are a step in the right direction, he says.
But the halting recovery is a far cry from the booming wealth and economic growth that drew many banks to the UAE during the past decade. The UAE's average wealth per adult more than tripled between the start of the decade and 2007, according to data from the Credit Suisse Global Wealth Report.
But average wealth per adult has fallen 32.9 per cent to US$115,774 (Dh425,272) this year, since peaking at $172,653 in 2007.
Debts soared in the same decade, depressing levels of net worth. Debt per adult rose from $7,110 in 2000 to $31,359 this year, the same data shows.
And a surge in credit to companies, particularly Dubai's government-related holding companies, brought a bonanza for banks during the boom. But now, bad debts have risen sharply and ratings agencies expect them to continue climbing in the year ahead.
Banks' provisions to cover non-performing loans rose to Dh51.9 billion in October from Dh19.7bn at the end of 2008, according to the Central Bank.
Renegotiated debts at companies such as Dubai Holding and Dubai World may yet resurface and cause problems for banks, Fitch Ratings warned this month, adding that the scale of lending to the Dubai Government and its various holding companies remained a weak point in the UAE's financial system.
"Over-reliance on lending to government-related entities led to the downfall of Dubai Bank, which has been recently taken over by Emirates NBD," the report said.
Abu Dhabi's debts, once government holding companies are included, account for $123bn, or about 60 per cent of GDP, and only a little less than the $129bn owed by Dubai and its holding companies, according to Bank of America Merrill Lynch.
Dubai has returned to bond markets twice in the past two years, but investors remain sceptical of the emirate's debt. Credit default swaps on Dubai Government bonds, used to insure against the risk that an issuer will not be able to pay its bills, currently trade at 453.29 basis points, the highest in the Middle East after post-revolution Egypt.
Mubadala Development, a strategic investment company owned by the Abu Dhabi Government, and the International Petroleum Investment Company have been able to sell bonds despite the difficulties in Dubai, allowing local debt markets to bounce back from the crisis - and banks to reap large fees.
But investment banks have found slim pickings in local equities after the stock market sell-off of 2008.
A drought of initial public offerings has limited the amount of income that investment banks can earn from equity underwriting.
International banks including HSBC, Nomura and Barclays have reduced job numbers in the UAE, while others have scaled back their equity research and sales divisions.
Amid the plunge in stock market activity, institutions such as HSBC Middle East, Rasmala Investment Bank and Shuaa Capital have sought to close their brokerage units or refocus on institutional clients.
With interest rates on deposits at historic lows and faith in banks' strength shaken by the financial crisis, many retail investors have shifted assets from banks to online trading in currencies and bullion.
"The foreign exchange market offers a level of flexibility not seen on other markets," says Jakob Beck Thomsen, the regional head of Saxo Bank, an online brokerage. "It offers a high level of transparency [and] liquidity, and the volatility creates a high number of trading opportunities that appeal to the active investor."
The Middle East's contribution to Saxo Bank's total earnings has doubled in the space of a few years, Mr Thomsen says.
The market realities of the UAE, in which 51 banks serve a market with a potential 2 million individuals, has compelled retail banks rapidly to reassess their business lines to tackle an equally rapid rise in costs. Regulation of retail lending by the Central Bank has accelerated that drive.
Emirates NBD's forced takeover of Dubai Bank was perhaps not the type of consolidation in the sector that some in the industry had hoped for.
But private banks are also starting to see a shake-up. EFG International, a Swiss bank, pulled out of the Middle East in October, while Clariden Leu was absorbed into Credit Suisse last month, reducing the number of private banks operating in the UAE.
This process is set to continue in the year ahead, says Pierre-Olivier Fragnière, an executive board member and the head of the international division at Banque Cantonale de Genève, a Swiss private bank.
"The process of merging between private banks has started," Mr Fragnière says. "Because of this, some of the small players will disappear - both banks active in the lending and non-lending business." The National