DUBAI – Bank shares in the United Arab Emirates are on the move, supporting a rally of the entire equity market as the heavy burden of Dubai’s corporate debt crisis starts to lift from banks’ balance sheets.



The banks are heavily exposed to state-linked companies which borrowed for ambitious real estate projects in the mid-2000s, then ran into trouble and began restructuring billions of dollars of debt in 2009-2010.



The restructuring process hasn’t finished yet, and in some cases, debt defaults have been avoided only by pushing maturity dates several years into the future. So banks could face further losses as those dates approach.



Nevertheless, the banks’ earnings for the last quarter of 2012, announced in the past couple of weeks, and other data suggest the worst is over. This has drawn investors back to bank shares after several years of neglect.

"Provisioning is declining and you see non-performing loans flattening, which signals that banks are becoming more comfortable from an asset quality perspective," said Ali Adou, portfolio manager at Abu Dhabi-based investment firm The National Investor.



"These numbers are a big change for UAE banks - a turning point."

Bank shares are vital for any lasting rally of the stock market because they are heavily weighted. Dubai-listed banks account for about a quarter of the emirate’s market capitalization while in Abu Dhabi, the ratio is near 45 percent.



Dubai’s banking share index declined every year in the five years through 2012, ensuring that the overall market index could at best move sideways during that period.



So far this year, however, the pattern is very different. The Dubai bank index is up 13.2 percent since the end of 2012, contributing to a 15.3 percent gain in the overall index; the Abu Dhabi bank index is up 11.4 percent, outperforming a 10.1 percent increase of the overall market.



A milestone in UAE banks’ recovery was reached last October when total outstanding provisions which they had set aside for bad loans fell from the previous month for the first time since 2008, according to central bank data.



The most recent data, for November, shows total provisions resumed rising in that month. But investors now believe a peak for provisions is near, especially since prices in parts of the Dubai real estate market have begun to rebound.



Fourth-quarter bank earnings have backed up the recovery story. Abu Dhabi Commercial Bank beat analysts’ forecasts with a 32 percent jump in profit compared to a year earlier; its shares are up 22.3 percent so far this year. — Reuters