Tuesday, March 3, 2009

Worried about UAE banks

The more I think about the United Arab Emirates banking system, the more I fret.

Ok, very rough calculations, but according to the UAE central bank stats for January, the UAE banks have total assets of AED1.466 trillion, or very nearly $400 billion. Lets assume - charitably - that 20% of that is money lent to the property sector in the country. (in reality it is much more as the 20% cap seems to work separately for real estate companies, construction companies and morgages, and many banks have thus in reality exceeded a 20% exposure.)

That makes $80 billion exposed to real estate, minimum. Given a minimum 30% drop in real estate prices that means that assets should extremely conservatively be marked down by $24 billion. Non-performing loan provisions of banks was at AED26.1 billion in January, or $7.1 billion. This would indicate that NPL provisions should more than treble, but is still maneagable.

However, a more realistic scenario would be an estimate that half of banks' assets are directly exposed to real estate in some form or fashion. Given that a 50% drop in asset values (everything from mortgages, direct property ownership and stakes in developers, contractors and related companies) is likely, if not conservative, that could mean losses of $100 billion right?

Even Abu Dhabi would blanch at the cost of that bail-out.


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