UAE banks under increasing pressure

The country’s banks are coming under further pressure as the economy slows, leading to calls for additional government measures to ensure their strength. The Central Bank and Federal Government have taken several unprecedented steps as the global financial crisis has arrived in the Gulf, including announcing a plan to inject Dh120 billion (US$32.67bn) into the country’s banking system. Those funds are intended to replace funds withdrawn by foreign investors and international lenders in recent months and prevent banks from cutting back on lending. As the global credit crunch has hit the country, however, the economy is losing steam and property prices have begun to fall. Both of those trends could hurt banks. A decline in financial market activity could also undermine financial performance, according to Raj Madha, a banking analyst at EFG Hermes. But falling property markets create some of the biggest problems for performance as the property and banking sectors risk falling into a mutually reinforcing decline. Banks have some exposure to property buyers via mortgage loans, but the bigger threat may come from loans made to property developers and construction contractors, Mr Mahda said. Already struggling in some quarters, the banking industry may even be contributing to the problems by restricting loans in an attempt to reduce their own risk. That is undercutting demand for property and sending prices lower, said Mushtaq Khan, an economist at Citigroup. “We believe banks are now so concerned about the future of real estate, and other banks, that they have stopped lending to individuals affiliated with these sectors,” Mr Khan said in a report. Such caution is likely to “choke back growth” and make it difficult for new buyers to emerge. “The lack of liquidity is compounding the problems in the real estate sector,” he said. Mr Madha said concerns surrounding the banks have driven their shares to extremely low levels and they could rebound if the government moves aggressively to bolster the system. The government should make moves to eliminate the “structural risk” to the system presented by the possibility of default by large property developers. “The first thing we would like to see is an explicit guarantee of the solvency of the major developers, not only with a guarantee on their existing debt, but a guarantee to finance what we see as an excess inventory build-up,” he said. Mr Khan said the Dh120bn that the Government has pledged to local banks during the past few months has not been injected into the system quickly enough. “In our view, the authorities need to inject liquidity more aggressively, perhaps taking their cue from Kuwait and Saudi Arabia, if not from the US itself,” he said.