UAE banks skirting global financial crisis

However, real estate booms can prove much longer and more durable than pessimists predict, and even the diehards would have to concede that the downturns in the US and UK took a lot longer to materialise than forecast.

In the case of the UK prices went up for almost 15 years before turning down.

Kuwait based Global Investment House published a useful outsider's report on the state of the UAE banks last week. It highlighted a 23% exposure to 'personal loans for business and consumption', much of which is thought to have gone into real estate and the local stock market.

Mortgage loans remain very low for an economy the size of the UAE at Dhs50.1bn, albeit up from Dhs31bn in 2006 and Dhs17.2bn in 2005. Indeed, this remains an opportunity and not a threat to the UAE banks, and how many banking systems around the world today would see mortgage business as a growth sector?

Booming profits

The GIH study showed that total bank profits grew by 23% in 2007 and assets by 43% to Dhs1.2 trillion, the largest of any GCC state. Return on equity was up from 18.2% to 21%. And the capital to assets ratio a very healthy 14.2%, far above the level some big US banks are struggling to maintain.

Foreign assets comprised 21.5% of total assets at the end of September 2007 but this is down from 32.7% in 2001.

It is perhaps hardly surprising that with oil above $100-a-barrel and having been on a rising trend since 2001, liquidity has piled up at the local banks. There are 22 national banks and 27 foreign banks in the emirates and national banks have outperformed in terms of credit growth in the past three years.

Tax implications

Foreign banks pay a 20% tax that national banks do not pay, while national banks have been more ready to become lenders in the local real estate boom and government led mega projects.

Therefore national banks are more exposed to a real estate downturn than the foreign banks. In other emerging markets the pattern has been for large foreign banks to sit back in real estate booms and then buy the national champions cheaply in a market correction.

But given that Citi was recently bailed out by Abu Dhabi Investment Authority with a multi-billion dollar equity injection, it is difficult to envisage circumstances in which the tables might be turned.

For the time being, UAE banks look well positioned to carry on doing what they do best which is make money while overseas banks muddle their way through the mounting global financial crisis.