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First with Financial Comment from Arabia

ADCB losses reflect reality of UAE banks’ bad debts

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Write offs against bad loans and investment losses cost the Abu Dhabi Commercial Bank $1 billion last year, leaving the leading UAE commercial bank with an annual loss of $139 million compared with a profit of $380 million in 2008.

As ADCB chairman Eisa Al Suwaidi explained: ‘The decision to take record provisions has resulted in the bottom line of the bank to go into negative territory’.

Bad debts

Last October ADCB revealed it was owed $405 million by the Saad Group and $204 million by the Algosaibi family – two large Saudi groups with well publicized financial problems. That made the bank the highest creditor in the UAE to acknowledge its position.

However, the impact on profits turned into losses is immediate, and was not expected by analysts following the sector. Will more banks now surprise to the downside with their provisions? That is always possible.

But the bigger question mark remains over what else lies buried in the balance sheets of the local banks. Given the scale of the property crash in the emirates last year it would be very surprising if other UAE banks did not have some unexpected provisions.

It will all depend on what the UAE Central Bank tells the banks to do about bad debts. Banks will always try to put off making provisions, hoping that loans will come right but clearly there is a point of no-return.

There is also an argument for clearing the bad debts out of the banking system. They tend to clog up the system and inhibit the granting of new loans essential to boosting economic recovery. If the provisions are really not that big then why not get them done?

Net global creditor

Certainly the UAE as a net global creditor nation only has a technical problem with its bad debts. Its true balance sheet is among the best in the world.

The banks are also not in such bad shape if the ADCB results are any guide. Even last year ADCB revenues were up nine per cent to $1.3 billion, loans and deposits up 10 per cent and capital adequacy jumped from 11 to 17 per cent.

Flushing the bad debts out of the system makes good sense if the system can handle the strain. The UAE is more fortunate than many nations in being in that happy position.

The downside would clearly be for local bank shareholders. Equity values are a function of profit, and if profits are hit so also will be share prices. Banks are an important part of the UAE stock markets and this outlook does help to explain the weakness of local equity markets at the moment.

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Written by Peter Cooper

January 27, 2010 at 8:40 am

Posted in Banking, UAE Stocks

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