Dubai: The UAE’s banking credit growth is expected to be around 8-9 per cent in 2014-15 due to healthy economic activity, Standard and Poor’s said in a report on Wednesday.
The ratings agency expects Dubai-based banks to grow faster than their peers in Abu Dhabi, as banks in Dubai have again focused on lending, with most of them improving significantly on their asset quality and funding profiles.
“The key risk if they were to re-visit their strategy of the aggressive credit growth, so far that has not been the case, which is a positive,” Timucin Engin, an analyst at Standard & Poor’s, told Gulf News.
“There has been a visible improvement in non-performing loans in Dubai. We are seeing a recovery in credit growth as real estate prices recovered substantially, thereby improving the asset quality,” Engin said.
The credit growth in the first five months of 2014 in the UAE was about 4 per cent, according to S&P. In 2008, due to a sharp correction in real estate prices, there had been an increase in bad loans, impacting the asset quality of banks.
Due to a substantial recovery in the real estate prices, some of the banks’ exposures have made significant recovery. UAE banks’ overall corporate borrower profile has also improved over past two years, as the key non-oil economic sectors such as tourism, trade and corporate services have been performing well, and government related entities in Dubai have continued to strengthen their balance sheets.
GCC banks’ growth.
Net interest margins
Elsewhere in the Gulf region, banks witnessed healthy earnings growth over the last year and a half, despite historically low interest rates. Banks in the GCC (Gulf Cooperation Council) countries have experienced lower net interest margins, but improving asset quality and falling credit losses have generally offset this.
“Prospects for economic growth in the Gulf region remain healthy for the next few years,” said Engin, adding: “We expect most Gulf banks to continue to benefit from robust corporate activity and consumer consumption over the next 18–24 months. The many infrastructure projects planned in the Gulf should translate into sustained streams of corporate lending.”
Prospects for economic growth in the region remain healthy for the next few years.
Over the past three years, strong liquidity flows into the Gulf’s deposit markets have supported the region’s banks, which traditionally rely on local deposits for the bulk of their funding.
Regional sovereigns and their affiliated entities are key depositors in the local markets, and their fiscal positions should continue to be bolstered by strong oil prices.
“We believe the banks in the region are well-positioned to comply with the incoming Basel III rules. …given their strong earnings generation, Gulf banks can boost their capital if needed by minimising dividend payouts,” the S&P report stated.
