The investment bank EFG-Hermes is warning that the fallout sparked by SME debt delinquencies may spread to individual borrowers as the strain from the weakening economy increases.
While the bank’s fourth-quarter earnings grew compared with the third quarter, they were largely propped up by one-off gains and increases in non-interest income, said Shabbir Malik, the author of a report released on Thursday.
More worryingly, banks are putting aside more cash to cover any nasty surprises this year, he said.
“Credit-quality deterioration was a common theme across bank results this quarter,” Mr Malik said. “We urge caution in 2016, particularly as we expect a second wave of provisioning from the retail segment following a surge in delinquencies.”
Mr Malik said that provisioning rose for the first time since 2013 as more small businesses defaulted on debt amid slowing demand and banks reacted by taking more precautionary measures.
Loan growth, however, remained stable at 10 per cent year-on-year in the fourth quarter, and more cash was available in the banking system. That is because banks mobilised more deposits and reduced short-term loans for trade finance.
The crash in the price of oil that began a year and a half ago and which has cut 70 per cent of the commodity’s value has decreased deposits in banks as more governments in the region yank reserves to plug deficits and the amounts coming in from oil sales drops.
Alex Thursby, the chief executive of the National Bank of Abu Dhabi, said in December that UAE banks had lost more than US$15 billion in government deposits since last September, when the drop in oil price began to accelerate.
Separately, UAE Central Bank data showed yesterday that assets held outside the country fell by 13 per cent to Dh296.9bn in January from Dh341.1bn in December as the Government sought to fill shortfalls.
Cash, bank balances and deposits with banks abroad dropped almost 30 per cent to Dh122.2bn, while investments in held-to-maturity foreign securities and other foreign assets increased, according to the data.
The UAE uses proceeds from the sale of crude to fund more than 60 per cent of the Federal budget.
“As public finances face a second year of challenging oil prices, the UAE will likely issue debt and tap into its savings in order to support government spending and economic activity,” said Carla Slim, the Middle East and North Africa economist at Standard Chartered in Dubai.
Net foreign assets of the Saudi Arabian Monetary Agency, the kingdom’s central bank, have also fallen in the 11 months to December as the country sought to bridge its budget deficit.
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