Dubai: Amidst challenging operating conditions, the UAE’s more diversified economy and the macro-prudential initiatives in real estate and banking regulations since the 2008 global financial crisis will support the solvency profiles of banks, according to rating agency Moody’s.
With the oil slump still pressuring the funding environment for lenders across the GCC, the UAE banking sector remains moderately exposed to a prolonged period of low oil prices.
Deposit growth is expected to slow significantly to around 3 per cent, down from the 2012-14 levels of around 10 per cent.
Reduced oil revenues for regional governments have already led to a more challenging funding environment. Analysts expect liquidity to remain tight over 2016.
While GCC banks’ asset quality performance and capital buffers have been broadly maintained so far, Moody’s expects that pressure on loan growth and asset quality could increase if governments tighten spending and let the non-oil economy slow further.
The widening gap between current oil prices and the break-even prices required across the GCC have resulted in a significant increase in some of these governments’ deficits, weakening their own creditworthiness.
These developments also have reduced capacity, and possibly the willingness of these governments to support both the broad economy and banks in times of stress.
While sovereign buffers remain large in the UAE, bank deposit ratings in the country are vulnerable given their link to the government’s rating and the assumption of a very high probability of government support.
Across the GCC, credit growth has slowed along with the non-oil economy, reducing business and consumer confidence. The impact on loan performance so far has been limited and capital buffers remain robust.
Funding and liquidity, however, are becoming expensive, reflecting increasing government borrowings, reduced deposit inflows and rising interest rates.
“Lower oil revenues are driving [the] tightening of liquidity in the GCC, with overall deposit growth slowing down significantly to around 3 per cent in 2015, from around 10 per cent in 2014,” said Nitish Bhojnagarwala, an assistant vice-president at Moody’s. “Moreover, liquid asset buffers are broadly expected to decline by around 20 per cent across the region over 2016.”
Although GCC-wide liquid asset buffers remain sound at around 20 per cent-25 per cent of total assets, these trends are driving up the market funding levels of domestic banks, increasing their overall cost of funds and dampening profitability.
According to Moody’s, like other GCC peers, the UAE banking system has also witnessed declines in deposit growth.
Direct government and government-related entities’ deposits have declined by around 4 per cent during 2015, a reversal from the previous trend.
Within the UAE, the decline in these deposits was more pronounced amongst Abu Dhabi-based banks, where the local government is a dominant depositor in the system.
Dubai-based banks benefit from a more diversified depositor base but are also vulnerable to a reduced flow of government deposits, given the systemic impact of such declines.
