Focus on problem loans

09 February 2016

A difficult 2016 will show which banks and borrowers can balance their books

During the GCC’s liquidity and economic boom from 2011 to 2014, companies were eager to take on huge amounts of debt for ambitious expansion plans. Banks were competing to lend to them at rock-bottom margins.

But the era of 5 per cent GDP growth and cheap money has come to an end. GDP projections for 2016 and 2017 converge at about 2 or 3 per cent, depending on the country. Revenue growth will slow accordingly and the cost of debt is rising.

The more difficult economic context will test which companies can still service their debts and maintain a strong cash flow.

Small-to-medium enterprises (SMEs) in the UAE began to struggle in late 2015.

Earlier this month, MEED reported that three ‘bluechip’ Saudi companies have been discussing their debt obligations with banks.

The economic conditions will also test which banks built their asset portfolios wisely in the boom times, when loan books were growing at more than 10 per cent a year.

In the best-case scenario, GCC banks have learnt from the 2008 debt crisis that hit Dubai, and other GCC economies to a lesser extent.

Several major local firms, both private and state-owned, had unsustainable amounts of debt. Multibillion-dollar restructurings lasted for years.

The level of impairment charges reveal banks’ assessment of both the wider economy and their own portfolios. There is some room for leeway depending on their own outlook and how much they prioritise shareholder dividends.

Sharjah’s United Arab Bank has already posted a loss due to a spike in problem loans and a rise in impairment provisioning, suggesting it expects more loans write-offs in 2016. Smaller banks that had aggressive strategies are expected to suffer most.

Dubai’s Emirates NBD, on the other hand, is confident, reducing its provisioning by almost a third.

Philippa Wilkinson

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