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Thursday, 4 March 2010

Sell the UAE banks paying big dividends? (Re-post)



UAE banks are being rapped for continuing to pay out high dividends at a time when the need to keep capital for future write-offs is only too obvious.
By contrast global but local banks like HSBC and Standard Chartered are already making big provisions in the region. HSBC raised its provisions in the Middle East five-fold to $1.3 billion for 2009, and posted its first-ever loss in the UAE of $3 million for the year.

Local and global

Standard Chartered Bank does not break down its provisions but overall they increased from $1.3 billion to $2 billion last year, doubtless also reflecting write-offs in the region.
Releasing a record $3.4 billion profit this week Standard Chartered said its exposure to ‘certain high profile entities’ is around $500 million in the UAE, adding that it did not expect ‘material losses’.
Should local banks have exercised similar caution? The UAE Central Bank had asked for cash dividends to be limited to 50 per cent of net profit for the year. Yet not all banks heeded this advice and some have even paid out more than their annual profits.
Dividend payments from the Bank of Sharjah, National Bank of Umm Al Quwain, Dubai Islamic Bank and United Arab Bank stood at 80, 85, 57 and 53 per cent respectively.
By contrast Emirates NBD paid out a 20 per cent dividend, and the very conservative National Bank of Abu Dhabi cut its dividend from 30 to 10 per cent.

Capital base

The important point is that once capital is paid out as a dividend it can not be recalled. So if bank provisions rocket in 2010, as many analysts say will happen as the full impact of the local real estate crash becomes apparent, then banks will be left short of capital and have to raise more funds, or be forced into rapid mergers and marriages of convenience.
For investors receiving their dividends now may therefore come at the cost of lower future profits and lower share prices later. It is also an argument for selling shares in the banks that have made what appear to be inadequate provisions against bad loans.
Of course without sight of the banks’ loan books it is impossible to tell the true position. If things go badly managers will just argue that they were being too optimistic. But that will hardly help shareholders.END