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First with Financial Comment from Arabia

Dubai debt write-offs far from over for UAE banks

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UAE bank full-year results for 2009 are coming in line with expectations, and feature substantial write-offs for the Algosaibi and Saad groups in Saudi Arabia. But the big gorilla in the front drawing room remains bank write-offs for the Dubai real estate crash.

Dubai World may have declared a $22 billion debt restructuring that brought negative headlines around the world from November 25th to mid-December last year, but Dubai World debt has not yet been classified by any UAE bank as non-performing.

UP provisions

That said, the Emirates NBD results showing a nine per cent fall in annual net profits to $897 million for 2009 did include the bank’s first write-down against Union Properties, Dubai’s second largest property developer that is partly owned by the bank. But $86 million is unlikely to be the last write-off against Union Properties.

The largest bank in the Gulf States said sovereign debt accounted for 22 per cent of its $58.3 billion loan book, or $12.8 billion of which analysts attribute the majority to Dubai Government related entities including Dubai World.

Provisions are guided by the UAE Central Bank which is fairly strict in demanding that non-performing loans be recognized according to international accounting standards. If such losses arise in the course of 2010 then it will be the accounts of this year that take the biggest hit.

Nobody really knows how large total losses from the collapse of the Dubai property boom will prove to be, and there are also non-performing loans in the northern emirates and Abu Dhabi as well. Indeed, the banks themselves must have an idea but are by no means sure of the precise total, and will still be hoping for the best with Dubai World, for example.

Banking crisis not over

However, to talk as some of the popular local media likes to do of a quick recovery in the UAE banking sector is clearly very premature. The full extent of the problem facing the sector in 2010 has not even be finalized, let alone resolved.

In the early 1980s, which government ministers have started to cite as a model for dealing with the current situation, several UAE banks went through hurried mergers and reorganizations as the true extent of bank finances became apparent. A similar local banking crisis in the aftermath of the recent real estate crash and global financial crisis must therefore seem a logical proposition.

But there is no need to panic. The UAE Government has guaranteed all bank deposits of any size, and that is one of the best guarantees in the world.

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Written by Peter Cooper

February 13, 2010 at 11:10 am

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