Gulf banks weather pandemic storm – for now

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Gulf banks weather pandemic storm – for now

A thrill went through the UAE’s financial community last week when Emirates NDB, the champion of Dubai’s banking industry and one of the region’s largest banks, announced figures for the first half of 2020.

It’s not just that profits are down 45% from comparable half to AED4.1 billion ($ 1.1 billion). This could be partly explained by the fact that last time ENBD made a good profit on the exchange sale of its payment unit, Network International.

What worried analysts was that the bank revealed a sharp increase in “provisions for impairment” to cover the estimated costs of bad debts in the first half of the year. After the most difficult six months in years due to the pandemic lockdown and the sharp decline in economic activity, a sharp increase in bad debt could be a healthy sign of financial prudence on the part of the ENBD – or it could be an indicator that a growing number of ENBD clients were on the verge of financial trouble.

As a Dubai establishment banker, that would bode well for the emirate’s financial system and raise concerns that it was facing the kind of crisis that hit in 2009 at the height of the global financial crisis. .

Then a drop in the value of deposits in UAE banks forced them to look to international financial systems for funds, and when that wholesale funding dried up in the credit crunch, the threat which resulted in liquidity caused a brief but serious threat to liquidity.

Dubai weathered this crisis with help from Abu Dhabi and by renegotiating its long-term commitments held by friendly foreign banks, but it was a short-term affair. A new study of the regional banking system by Capital Economics, the London-based consultancy firm, reveals that these fears this time around are mostly exaggerated. While there are pockets of vulnerability in banks in the Middle East and North Africa, most Gulf Cooperation Council countries are generally well positioned to weather the pandemic storm.

Although there was an increase in nonperforming loans (NPLs) – when the bank decided that the debtor had no chance of paying principal or interest and wrote it off as an asset – most regional banks comply with international guidelines on this well-being criterion.

In the United Arab Emirates, the level of non-performing loans is high at 8.7% of total loans, but it is still far from levels that the global banking system considers to be a serious ‘at risk’ threat that could threaten the viability of the whole bank.

Saudi Arabia is even less of a concern in the CapEcon analysis. The estimated NPL level of 1.4% of loans would need to be multiplied by around 10 before violating international guidelines.

“Pockets of vulnerability” include Qatar and Lebanon.

The former injected large public sector deposits into its banking system in 2017, when its links with the regional banking system were disrupted by the severing of economic ties with its neighbors.
It could do the same, but there is a risk that the balance sheets of Qatar’s banks will contract and domestic credit conditions deteriorate.

In Lebanon, the threat is obvious. The country was already in an economic and financial crisis before the pandemic and, with breaches of international obligations and a collapse in exchange rates, there may well be further deterioration before a way out is found. Beirut’s banks have gone from “really bad” to “even worse,” CapEcon said.

Thus, outside of these problematic areas, regional banks appear reasonably well capitalized and able to withstand the economic shock of the pandemic.

But the unpredictability of the next phase of the COVID crisis is a big concern. Many financial institutions are becoming increasingly dependent on access to foreign funds, and concerns about international financial conditions are strongly expressed in the second half of the year.

The sharp decline in ENBD looks like a unique outlier in a generally stable and well-capitalized system. But, in the age of COVID, who really knows?

• Frank Kane is an award winning business journalist based in Dubai. Twitter: @frankkanedubai

Disclaimer: The opinions expressed by the authors of this section are their own and do not necessarily reflect the views of Arab News

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