* Bank shares strong for first time in five years
* Debt crisis provisioning seems close to peaking
* Q4 earnings supported recovery story
* Loan growth in economy still sluggish
* But dividends, valuations positive for shares
By Nadia Saleem
DUBAI, Feb 6 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 capitalisation 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.
Dubai's top lender, Emirates NBD, posted a fourth-quarter net profit that more than tripled on the back of lower impairments.
"Provisions of UAE banks are moderating," said Chiradeep Ghosh, equity research analyst at Bahrain's SICO. "Improving economic conditions and a pick-up in real estate prices are likely to further support lower provisioning, and can be positive for banks' profitability."
The outlook for the banks is not perfect. New lending in the UAE economy has remained stubbornly sluggish; the latest central bank data showed loan growth in the banking sector was just 3.4 percent in the first 11 months of 2012, far from the double-digit rates being enjoyed in neighbouring Saudi Arabia.
But even without strong underlying earnings growth, bank shares may remain attractive for two reasons. One is high dividends; ENBD has proposed a cash dividend of 25 percent for 2012, up from 20 percent for 2011, while ADCB has proposed a 25 percent cash dividend.
"The fact that banks are paying high dividends is giving comfort to fund managers to go back and buy into banks for a higher yield play," said TNI's Adou.
And even though bank shares have jumped in recent weeks, they are coming off a low base, which means valuations are not high, analysts say. ADCB, for example, is trading at about 7.9 times estimated 2013 earnings, Thomson Reuters data shows.
"Prices and valuations have more upside in 2013," said Musa Haddad, head of investment advisory services at National Bank of Abu Dhabi.