Property prices make banks vulnerable:

Dubai Property: Seeing tremendous growth of assets in economy, the Leading banks in UAE are providing exceptional financial services. However, this growth remains overshadowed by asset and oil price volatility. This statement was provided by standard and poor in its credit risk analysis of banks based in UAE.
The credit analyst of standard & Poor’s, Emmanuel Volland expressed that although banks had the capacity to absorb sharp drops in 2006 local equity prices, the real estate prices may have much severe consequences. With total asset worth of Dh714.1 billion ($194.3 billion), the UAE banking system is second largest amongst others in GCC.
The S & P analysis state that there are likely to be two serious consequences pertaining to last year’s market correction for UAE banks. The business volumes are low, particularly personal for share trading and consumption both. There is also a pressure on household disposable income, whereas indicators for asset quality are set either to plateau or reverse.
According to reports the asset quality could show deterioration if oil or real estate prices fall, even though the asset quality is showing an improvement. The bigger banks would still be less affected as compared to smaller ones in the real estate Dubai market. These large banks have been well prepared through implementation of strict policies of margin lending. They have set aside additional provisions and have even strengthened their capital base.
Standard & Poor’s have a major source of concern for UAE banks i.e. the rapid price increase in the past few years for real property. It is furthered by increasing population due to rise in expatriate worker numbers, along with permission for non-nationals to own property in some areas.
The report examined that real estate market fall-down would severely impact the banking industry since this sector is capped by a 15 percent of banks lending limits as per domestic regulation. The overall economy is further based along property development and trading having a skeptical behavior. This can indirectly affect the less diversified banks.
Banking industry of UAE has seen some high-end growth in past few years in loan and deposit areas. The huge non-current profits from IPO’s and brokerage transactions have given good financial performances for domestic players, an attribute which is hard to duplicate in 2007. Volland added that there has been an increase in price competitions in recent years that has put pressure on along with tempting fewer risk-averse participants to ease on underwriting procedures.
UAE economy is highly dependent on hydrocarbon sector, although much less than other in GCC. Almost 40 percent of the GDP comes from oil giving 70 percent for government revenues. Since public sector is the main stay of economy, it tends to have effects on bank performances. However, according to S & P report UAE is better structured to handle fluctuations and shocks than other GCC countries due to diversification of its economy. Further, large foreign assets generate good revenues giving some cushion to the economy. The current economic momentum has given Dubai an advantage to increase diversification immunizing both government revenues and GDP from fluctuations in oil prices.
Mohamed Damak who works as a credit analyst for S & P believes that concentration of risk is a major weakness that could pave way for credit issues for less capitalized and vulnerable institutions. He adds that their assessment for banking system in Dubai includes UAE’s interventionist policy, which is leaving the industry more prone to bigger problems.