As bad loans pile up, UAE banks brace for housing crisis



The weakening economy, rising bank provisions and falling house prices heighten fears that Dubai will face a repeat of 2009, when the government and state-owned enterprises restructured billions of debts. dollars, plunging the emirate into recession.

These fears may be unfounded, analysts say, as the reforms instituted in the aftermath of this crisis have positioned banks to better cope with the increase in defaults, whether by government, businesses or consumers. But banks’ exposure to real estate can still make them vulnerable.

Apparently, Dubai’s economy appears stable, with GDP growth of 2.1% this year, up from 1.9% in 2018, according to official data. Yet other indicators paint a much bleaker picture, with the IHS Markit Dubai Purchasing Managers’ Index falling to its lowest level in 3.5 years in August as three main sectors – travel and tourism, wholesale trade and retail, and construction – have all weakened.

House prices, meanwhile, fell 31% from a peak in mid-2014, according to consultants ValuStrat, echoing the crash from 2009 to 2011, when prices plunged by more than half. The Arab Spring then sparked a rebound as money and people fled conflict-affected countries such as Egypt and Syria, and the 2013 award of accommodation rights for Expo 2020 propelled home valuations at record highs.

Since then, however, falling oil prices, the blockade of Qatar and heightened tensions with Iran have held back Dubai’s economic growth, with over-ambitious tourism targets being gently revised and slashing public spending in the Arab Emirates. united, leading to job losses and a significantly weaker consumer sector.

Ehsan Khoman, head of MENA research and strategy at Japanese group Mitsubishi UFJ Financial in Dubai, said a lack of frequently reported data meant it was difficult to fully understand the performance of Dubai’s economy. But figures that are publicly available suggest that economic activity remains lukewarm, he said.

“While the real estate sector may continue to correct itself, we expect this will not cause major strains on [bank] balance sheets with less leverage in space compared to the previous recession which was largely credit fueled, ”he said.

Real estate exhibition

In 2015, real estate and construction loans accounted for around 18% of total loans from major banks in the UAE, while by the second quarter of 2019 this figure had risen to 20%, according to data from S&P Global Market Intelligence.

The asset quality of UAE banks has deteriorated, with ‘stage 3’ loans with impaired credit accounting for up to 4.5% of total loans at the end of 2018, up from 4.0% in 2015 .

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“Over the past four years, as the real estate market has deteriorated, banks’ real estate exposure has also increased, so the quality of their loan portfolios is unlikely to be as strong as in 2015,” said Asad Ahmed, managing director of Alvarez & Marsal Middle East, predicting that some bank write-downs for the year 2019 will be more than double digits in percentage points compared to 2018.

Despite weak demand, Dubai’s residential supply will increase to 659,000 units at the end of 2021 from 536,000 in mid-2019, according to forecasts by JLL consultants. House prices fell a further 9% year-on-year in the second quarter, JLL estimates, while commercial real estate occupancy rates and rental values ​​also prolonged the declines. S&P Global Ratings predicts that Dubai property prices will fall 5% to 10% in 2019.

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“Banks are exposed on both sides of real estate – as providers of capital to real estate developers and as providers of mortgage finance,” Ahmed said, noting that the sustained decline in house prices since 2014 means that many buyers of property in Dubai would have seen their equity wiped out.

“The buffer that this equity provided to banks might also be gone,” he said.

In a September memo, Fitch Ratings warned that UAE banks have not fully recovered from the previous real estate crash.

“Stage 2 and Stage 3 banks loans are already high, averaging 15-20% of gross lending together, and are likely to increase,” the rating agency warned. Fitch said smaller banks are more vulnerable to deteriorating credit conditions due to thinner capital reserves and lower income generation.

Entrepreneurs affected

The crisis has also hurt Dubai’s listed entrepreneurs.

Arabtec shares have plunged 90% in the past five years, with the automaker recording combined losses totaling MAD 5.7 billion in 2015 and 2016. It made a net profit of MAD 256 million in the year. last.

Entrepreneur Drake & Scull is under investigation by the UAE market regulator, after the company reported a loss of 4.5 billion dirhams in 2018. The company’s shares have been suspended since November 2018, when it owed 5.4 billion dirhams in bank loans and other debts at the end of 2018.

“The banking sector has concentrated its exposure to real estate and related sectors,” notes Fitch. “The default of a single large borrower could lead to a rapid deterioration in the quality of the assets of one or more banks.”

The overall loan portfolio of UAE banks stood at 1.7 trillion dirhams at the end of 2018, 65 percent of which was lending to wholesale companies, according to a July report from the central bank. Loans to individuals (21%), loans to government entities (12%) and loans to non-bank financial institutions (2%) made up the remainder.

The government of Dubai and government-related entities have combined debts of around $ 124 billion, which is more than 100% of 2018 GDP, according to estimates by S&P Global Ratings, while in September, Fitch warned that a “significant part” of the 23 billion dollars owed by the government of Dubai and due to fall due at the end of 2021, could be restructured.

It all depends on the ability of Expo 2020’s 40 billion dirhams to meet their goal of attracting 25 million visitors – or 144,500 per day – during its six months.

“There is a risk that once the Expo is over, revenues from the real estate, construction, hospitality and retail sectors will turn out lower than expected, forcing some companies to having trouble repaying their debts, “said James Swanston, Middle East and North Africa. Economist at Capital Economics in London.

“Numerous [government-related entities] will have to repay high levels of debt over the next few years. If they have trouble making these refunds, we suspect Abu Dhabi will come to the rescue again. “


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