Banking & Finance

Bad loan provisions drop markedly at UAE banks

August 22, 2024

People, Person, Backpack — Emirates NBD reported high recoveries in the first two quarters of the year

Experiencing fewer loan defaults
Strong revenue growth
Analysts warn over US rate cuts

Most of the UAE’s top banks have significantly reduced how much they put aside to cover bad loans, in an indication of a generally benign economy and expectations of growth stretching into next year.

During April and June this year, banks set aside AED1.3 billion ($350 million) in net loan loss provisions (LLPs) – the amount they keep in reserve to cover the anticipated non-payment of loans.

This was a reduction of 35 percent compared to the first quarter of 2024 and down 60 percent year on year, consultancy Alvarez and Marsal said in its UAE Banking Pulse report.

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The top 10 banks reported strong revenue growth during the second quarter – up 12 percent year on year to $5.8 billion, mainly on the back of demand for loans.

“This drop [in LLPs] indicates that banks are experiencing fewer loan defaults and have healthier loan portfolios,” said Vijay Valecha, chief investment officer at Century Financial.

In April the International Monetary Fund revised its full year GDP growth for the UAE downwards to 3.5 percent from 4 percent, but kept its forecast for 2025 at 4.2 percent.

However, Valecha said the 3.5 percent growth was still strong and was a factor in the lowering of LLPs.

“This [GDP] growth could lead to fewer loan defaults, reducing the need for high provisions against potential losses,” Valecha said.

“The economic outlook, supported by robust oil prices and diversification efforts, might have contributed to a healthier loan portfolio.”

Despite the overall positive outlook for LLPs, Asad Ahmed, A&M’s managing director for the Middle East, pointed out that the numbers varied across the 10 banks covered in the report.

These were First Abu Dhabi Bank (FAB), Emirates NBD (ENBD), Abu Dhabi Commercial Bank, Dubai Islamic Bank, Mashreq Bank, Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai, National Bank of Fujairah, National Bank of Ras Al-Khaimah and Sharjah Islamic Bank.

Ahmed said that six of the 10 had seen an improvement in LLPs but for two, ADIB and FAB, the 2024 numbers are higher.

“Where the consolidated positive impact is coming from is the provision reversals largely at ENBD and Mashreq, with the former reporting high recoveries in both Q1 and Q2," Ahmed said. Provision reversals mean that LLPs are reduced.

While Ahmed said he viewed the lower LLPs “as a sign of continued strength in the UAE economic sector”, Valecha warned that the interest rate cuts expected from the US Federal Reserve later this year may be a double-edged sword for UAE lenders.

“While lower rates can reduce default risks by easing borrower financial pressures, they often coincide with economic slowdowns, which can signal underlying weaknesses,” he said, pointing to the ongoing downturns in China and Europe.

“Balancing the benefits of lower rates with the risks of a weakening economy is essential.”