UAE Banks Put To The Test
Although the worst of the recession appears to be behind us, UAE banks remain risk averse and reluctant to extend credit to the private sector.
We believe much of this risk aversion on the part of banks stems from uncertainty aboutpotential future losses and write-downs. Our analysis aims to estimate just how big thesepotential losses may be, and whether UAE banks would be able to absorb them if theymaterialize.We have focused on what we consider to be the riskiest assets on UAE banks’ balancesheets:
Our base case suggests that UAE banks are, on average, capable of absorbing thepotential losses associated with more stringent default assumptions
Avg NPLratio (%)Avg TotalCapital (%)Avg Tier 1Capital (%)Cash provision shortall or100% NPL coverage (AED bn)Tier 1 capitalrequirements(AED bn)
Actual FY 09
Base case Scenario
Source: SHUAA Capital
1 Except Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) out of our eight UAE banks sample2 Total capital adequacy is Tier 1 plus Tier 2 capital. The UAE regulatory minimum was set at 12% by end-June 2010, and the Basel II minimum is 8%. For Tier 1 capital alone, theUAE minimum requirement is currently 8% and the Basel II minimum is 6%.