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Loan growth key test for Gulf banks' revival

Dubai, July 7, 2010

Investors are looking for signs of renewed lending growth from upcoming Gulf Arab bank results, where provisions for bad and doubtful debt will continue to weigh on second quarter profits, according to experts.

"NPLs will probably dominate the headline but we think attention should be put on loan book growth," said Daniel Broby, chief investment officer at Silk Invest fund.

"Outside of Dubai, we are expecting signs of loan growth right across the rest of region."

Thomson Reuters data showed that corporate lending in Europe, Middle East and Africa (EMEA) slumped 17 percent in the first half of the year.

However, the Gulf region's infrastructure and project funding needs favours plenty of borrowing opportunities in the near future though lending so far this year has been muted.

"Local banks are having a hard time just keeping pace with maturing loans in the 2007-2008 vintage," said Deepak Tolani, vice president for equity research at Al Mal Capital.

Tolani added however that lending for large infrastructure and transport projects in Saudi Arabia is already underway, and potential for major project financing in Abu Dhabi is also high.

Qatari lenders, usually among the first to report earnings in the region, are expected to show promising figures.

Analysts also expect a good showing from Omani lenders in the second quarter. "I'm quite positive about banks' Q2 earnings, which should see an improvement in core and non-core performance, particularly fees and commission income, plus lower provisions," said Ajeev Gopinath, assistant vice-president for asset management at Gulf Baader Capital Markets.

Banks in the UAE have suffered from substantial exposure to bad loans, particularly from the region-wide real estate slump which hit cities likes Dubai hard.

Some banks booked record provisions in 2009 as a result. Banks may have already booked impairments for exposure to the distressed debt of state-owned conglomerate Dubai World.

A large part of the estimated $15 billion exposure of UAE banks is thought to be carried by Dubai lender Emirates NBD and Abu Dhabi Commercial Bank. Official figures are undisclosed.

"The problem loan ratio for our rated banks is about 4.9 percent. I expect another 4 percent to be added for Dubai World exposure," said John Tofarides, analyst at Moody's, adding lenders faced losses of 10 to 20 per cent on their exposure.

Shares in Emirates NBD, until recently Dubai's largest lender by market value, have slipped over 15 percent this year. Dubai's banking index has fallen 10.2 percent.

Analysts polled by Reuters expect a drop of 13.7 percent in second quarter profit for ENBD. "Dubai's banking sector is still struggling as banks face a pipeline of provisions in Q3 and Q4," Tolani said.

Some Gulf banks are preparing some capital-boosting bond issues which could come in thev second half of the year if global volatility subsides.

Burgan Bank, the commercial banking arm of Kuwait's largest investment firm Kuwait Projects Co (KIPCO), plans to issue bonds worth upto $477.5 million. Other Gulf lenders such as Qatar's Doha Bank, and Bahrain's BBK are also planning bond sales when market conditions are more favourable.-Reuters




Tags: Gulf Banks | Test | loan growth |

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