UAE authorities have the capacity to recapitalise banks if necessary, and they should take additional measures to strengthen banks’ balance sheets, restore confidence and encourage banks to resume lending to households and businesses, the Dubai-based investment services provider said. 

Additional measures include “replacing high-risk assets in the banks’ balance sheets with low risk government securities, stricter provisioning requirements, and providing side measures to encourage bank lending to sectors and businesses with long-term strategic importance,” Shuaa said.

“The UAE banking sector overall has the ability to withstand potential losses associated with further deterioration in asset quality, largely due to the authorities’ efforts to strengthen banks’ balance sheets since the onset of the financial crisis,” Shuaa said.

The stress-test report is based on a sample of eight UAE banks accounting for almost 70 per cent of banking system assets in 2009.

The report observed that the slow recovery of private sector credit growth was a key factor undermining the UAE’s economic recovery.

“While the banks on average are well capitalised, Shuaa’s stress tests show that several banks would need additional capital injections to meet the central bank’s regulatory requirements in all given scenarios,” the report said.

Shuaa said it believes additional capital injections would be required for individual banks, ranging from Dh2.5 billion in the best-case scenario to Dh15.8 billion in the worst case. “We believe that the authorities have the capacity to provide this financial support, if ever required,” Shuaa said.

Shuaa said broad structural and economic reforms, including greater transparency by banks, is likely to be “the most effective tool for restoring confidence and improving access to funding, as well as encouraging greater investment and economic growth over the longer-term.”

“In a post-crisis situation where commercial banks are increasingly risk averse, the ability to attract long-term funding at good rates is a key element for sustainable credit and economic growth,”  it said.

The eight local banks stress-tested include Emirates NBD, National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Mashreqbank, First Gulf Bank, Dubai Islamic Bank, Union National Bank and Commercial Bank of Dubai.

The report focuses on what Shuaa considers to be the banks’ riskiest assets on their balance sheets. These include real estate and personal loans extended in 2008, potential losses associated with banks’ exposure to Saad, Al Gosaibi and Dubai World, and “renegotiated loans” which appeared on most banks’ FY09 financials. The report takes into account the fact that Dubai-based banks incur a higher risk associated with their real estate exposure than Abu-Dhabi based lenders.

Shuaa said much of the risk aversion on the part of banks stems from uncertainty about potential future losses and write-downs.

While the worst of the recession appears to be over, local banks remain risk averse. “Local banks continue to be nervous about extending credit to the private sector due to fears around potential future losses and write-downs they may face,” Shuaa said.

The UAE Central Bank figures showed that bank lending in the emirate grew by only 0.8 per cent during the first six months of the year, compared to 1.5 per cent and 24 per cent during the same periods in 2009 and 2008 respectively.