UAE banks remain the backbone of the nation

The stock market crash of 2006 impacted in two main respects on the UAE banking sector. First in the loss of IPO fees and loans related to IPO subscriptions which proved very profitable to the banks in 2004 and 2005.

Secondly, the Deutsche Bank report notes $9.4 billion in estimated outstanding loans related to the capital markets, mainly to super high net worth individuals. These loans have not turned bad, as the interest is being paid, but they are a potential liability in the future.

On the other hand, corporate and personal banking continues to enjoy a strong market in the UAE. Government spending and government-led project expenditure will continue on its upward path whatever the vagaries of the oil price, as a shrinking oil surplus is unlikely to impact on domestic policy.

GDP growth challenge

This will secure the position of companies operating in the UAE and their banking requirements in terms of loans and other services associated with big projects, even if nominal GDP growth shrinks below zero as it might well this year should oil prices continue to decline.

At the population level continued growth is also inevitable in view of the projects now in hand. This will provide banks with new retail customers. Witness Emirate Bank International's new package for recent arrivals in the UAE announced this week as an indicator of where banking services are going for growth.

However, if the stock market crisis is compounded by a major real estate correction then personal balance sheets may become rather stretched in the UAE, and this could see the emergence of non-performing loans in bank results, something that we have not yet seen.

Mortgage opportunity

On the other hand, as the latest Dubai Property article on this website explains it is also possible to see a property correction as an opportunity for the banks and not just a threat.

For as prices moderate there will be a larger universe of buyers looking for mortgage products. At present the inadequate security of mortgage loans in the UAE makes them expensive by international standards, but as this situation changes - with government legislation now under discussion - then a valuable new revenue stream will open to the banks.

Perhaps therefore investors looking at which UAE banking shares to buy should be paying more attention to their positioning in the future mortgage market than worrying about potential bad debts from the stock market crash. It will be the banks that win the mortgage race that take the pole position in the future.