Dubai: The UAE banking sector will witness the peaking of the non-performing loans (NPLs) this year and will see a modest fall in NPLs next year, Moody’s Investor Service said yesterday.
“We expect UAE-wide NPLs to peak in 2012 at the upper end of the 10-12 per cent range and then decline marginally in 2013 to the lower end of the 10-12 per cent range. While the peak will be largely driven by the culmination of impairments by government related issuers and legacy real estate exposures, we expect the slight easing of asset quality pressure in 2013,” said Khalid Ferdous Howladar, Vice President — Senior Credit Officer, Moody’s.
Moody’s said its outlook for the UAE banking system remains negative. Analysts attribute the outlook largely to legacy asset quality issues related to restructurings of corporates and government related entities.
The rating agency expects Abu-Dhabi-based banks to perform better, with about 6 per cent to 8 per cent NPLs in 2012, compared to Dubai-based banks, which e are expected maintain NPL ratios in the 15 per cent to 17 per cent range peaking in 2012.
Moody’s expects the overall loan growth in the country to be constrained by slower pace of economic recovery and overhang of NPLs from the past. Although Moody’s see the domestic operating environment to recover consistently, the rating agency said it expects weak confidence to generate only modest overall credit growth of 4 per cent to 7 per for 2012 and 2013. In relative terms, Moody’s analysts expect credit growth of Abu Dhabi banks faster supported by higher public sector spending and relative strength of their balance sheets.
Recently Standard & Poor’s said it expects the UAE banking system to register low single-digit credit growth in 2012. Since 2008, Abu Dhabi banks have continued to underwrite new loans, although at a moderate pace.
“Credit risk remains high in the UAE, in our view, notably owing to the debt overhang of some Dubai-based government-related entities (GREs), which we believe forces banks to adopt a conservative stance. Recently, UAE regulators tightened limits on lending to GREs and local governments, which will further restrict lending growth, in our view,” said Timucin Engin, an analyst with S&P.
With the expected modest loan growth, profitability is expected to remain constrained by cautious loan growth and high provisioning ..
In a recent statement the UAE Central Bank said, the banking system in the country is stable and banks adequately capitalised and are insulated from the current turmoil in financial market.
Rating agencies agree the UAE banks’ capitalization, funding and liquidity profiles to remain strong. “We expect Capitalisation to remain strong in 2012 and 2013, driven largely by subdued loan growth and some internal capital growth,” said Howladar.
