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2| pfi | Middle East Report 2010 GCC banks

State of the GCC banks

F Dubai

One might think that with all the bad news that has, and continues to, come from Dubai, it would be the Dubai banks that have fared worst in recent times. They have certainly felt the full force of the financial crisis, with the large restructurings at Dubai World and Nakheel, as well as other government-related entities (GREs) also look- ing to reschedule obligations. However, banks in the Emirate have not crumbled under the weight of this and, according to Fitch Ratings’ report: “UAE Banks’ Annual Review and Outlook”, Tier 1 capital ratios at the three biggest banks – Emirates NBD, Dubai Islamic Bank and Mashreqbank – continue to be at healthy levels.

inancial markets across the globe have taken a battering in the past couple of years, with the Gulf region experiencing its fair share of difficulty. While the Western world was brought to its knees by sub-prime mort- gages and collateralised debt obligations (CDOs), the GCC region has found its major issues com- ing from bursting real estate bubbles and over-extended balance sheets. And while it hasn’t seen the bank failures that have happened elsewhere, the GCC banking system has been severely tested and, thanks to much government support, has come through the eye of the storm. So what kind of state does the region’s financial system find itself in? The first point to note is that the GCC bank- ing system is not a single homogeneous block but a web of different structures and situations. Therefore, the strains being felt in one part of the region are not always replicat- ed across the board. This makes the drawing of a definitive, general conclusion on the health of the region’s banking sys- tem an impossible – and erroneous – task. What can be done is to highlight which areas of the system are more likely to see further trouble; and what the triggers for that might be.

Banking systems in the Gulf

Co-operation Council region have been forced to tackle the aftermath of the boom but what kind of position do they find themselves in now? David Frenchfinds out.

They have benefited from support measures brought in by the authorities. While some has come from the Dubai government – it purchased Dh4bn (US$1.1bn) of securities from Emirates NBD in June 2009 to help boost its Tier 1 capital – the UAE Central Bank has been the source of most of the financial assistance. This has come both in the form of capital injections (deposits that were turned into Tier 2 capital) and liquidity support (an Dh50bn short-term liquidity facility that gave banks access to funding at the height of the global financial cri- sis). This has ensured that no institution has got into seri- ous difficulty.

What has to be noted, though, is that much of the dam- age stemming from Dubai GREs has yet to work its way through the system. Provisioning at banks in the Emirate have mostly reflected bad loans made to individuals, such as loans defaulted on by expats leaving the country. Therefore, while provisioning has taken chunks out of profits in the last few quarters: for example, Emirates NBD, in its second-quarter results this year, set aside Dh1.2bn for provisions, up from Dh555m in the first quar- ter, impairment charges for Dubai World, Nakheel and other GRE restructurings have not yet been factored in. One analyst believes that, going forward, a number of Dubai banks will be forced to take “quite significant” impairment charges and things will get worse before they get better. With both the Dubai World and Nakheel restructurings moving towards an agreement with cred- itors, third-quarter results could see the first chunks of provisioning taken. But no one yet knows the full extent of the damage provisioning might do.

Kuwait and Bahrain While the travails of Dubai have made all the headlines, it is banking systems elsewhere in the GCC that, arguably, have suffered a greater degree of dislocation. Institutions both in Kuwait and Bahrain have come closer than any-

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