Wednesday, December 31, 2008

Banks under pressure on the prospect of increasing loan defaults

UAE faces a slowdown in property loans and real estate activity as the country's property boom loses steam amid the global credit crisis.

The mortgage defaults and property foreclosures is a very serious problem for banks and real estate developers are being hurt as home sales fall, making it harder for them to repay loans. UAE banks and lending institutions have begun toughening their lending criteria. Raj Madha, a director responsible for equity research at EFG-Hermes Holding SAE, said in a report that the scale of banking sector exposure to property developers and contractors means that a problem for the property sector is substantially a problem for the banks.

Moody's Investors Service has announced that it has revised downwards the outlooks on the ratings of four UAE banks - Dubai Islamic Bank PJSC, Dubai Bank, Abu Dhabi Commercial Bank PJSC and First Gulf Bank PJSC. They have changed the rating to 'negative' from 'stable' and the outlooks on the ratings for all senior unsecured debt issued by the above-named banks have also been revised accordingly.

John Tofarides, Analyst in Moody's Financial Institutions Group said that the rating reflects the growing downward pressures on asset prices and the anticipated profitability pressures from rising funding costs derived from increasingly scarce liquidity and loss of confidence. They have said that that soaring loan growth levels and future loan commitments are exacerbating the pressures on UAE banks' liquidity.

However, Obaid Humaid Al Tayer, Minister of State for Financial Affairs said that the outlook for economic growth for next year is positive. He added that Al Tayer said the Ministry of Finance had imposed conditions on the release of payments to banks to end the liquidity crisis. Central Bank Governor Sultan Nasser Al Suwaidi, in a speech to the FNC, said the national economy is strong. According to the IMF estimates, the economy grew 7 per cent this year and it is expected to slowdown next year.

1 comment:

sunil said...

defaults will continue to increase due to the weak job market. many banks that operate in dubai hold plenty of US debt. the default may very well be initaited in the USA, but the balance sheet impact will be felt by a bank somewhere in dubai. the global economy is way too intertwined and everyone holds everyone else's debt.