Dubai: High liquidity in the UAE banking sector is expected to partially mitigate the potential adverse impact of falling oil prices on the economy and funding of some of public and private sector projects, according to banks and analysts.
“Recent improvements in the performance of the banking sector support our view on the likely limited impact of lower oil prices on the UAE economy. The latest available data reported by Moody’s highlight slight improvement in the banks’ profitability on the back of higher asset growth and more moderate pace of provisioning,” said Alia Moubayed, an analyst with Barclays.
The UAE banking sector asset growth crept up to 15.4 per cent year on year in the third quarter of 2014 up from 11.9 per cent in 2013 and 8.3 per cent year on year in 2012. Loan growth during the first nine months of the year was 8.6 per cent year on year, accelerating from 7.7 per cent at end-2013 and 3.7 per cent at year end 2012.
While the loan growth picked up momentum, for the first 9 months of this year, most UAE banks reported robust growth in deposits. The sector’s loan to deposit ratio (LDR) stood at 97.7 per cent at end-September 2014, lower than the 108 per cent registered in 2008 when oil prices fell sharply and caused a liquidity squeeze in the system.
“This [strong LDR] is likely to continue supporting economic growth, notably in Dubai as the need for funding Expo 2020-related projects picks up steam, although it is worth noting that liquidity is more ample in Abu Dhabi than in Dubai based banks,” said Moubayed,
Buoyant economic growth and expanding loan portfolios resulted in improvement in banks’ asset quality, along with continued deleveraging of government related entities (GREs) and strengthened regulatory frameworks. Non performing loans (NPL) ratios of UAE banks declined to 8.7 per cent year on year in the first nine months of this year compared to 9.2 per cent in 201.
By year-end 2015, Moody’s expect further declines in the problem loans to gross loans ratio. This will be driven by improved operating environment improvements; tighter underwriting during the downturn period; a reduction in the stock of problem loans from continued settlements, recoveries and commercial restructurings, and expected loan growth of 7 per cent to 10 per cent.
“While loan loss coverage levels remain low compared to GCC peers at around 61 per cent for June 2014 (around 55 per cent as of December 2013), this metric will improve as the problem loan balance declines and banks’ increase their general provisioning,” said Khalid Howladar, Global Head — Islamic Finance at Moody’s
Barclays’ analysts expect for the fully year 2014 new NPL formation to continue to recede, aided by an improved operating environment and greater scrutiny in credit underwriting practices.
Strong capital adequacy levels of UAE banks also support their lending capability. The reported capital adequacy (Tier 1) ratios stood at 15.9 per cent at end of the third quart of this year, reflecting a solid capital base, despite a slight retreat from its 16.4 per cent level in 2013.
“While a fall in oil prices may affect deposit inflows (namely in Abu Dhabi banks through the size of government deposits), the sovereign ownership of many of these banks, as well as the ability and willingness of the sovereign to intervene (as witnessed in the past) will ensure that both their liquidity and capital remains supported,” said Barclays’ Moubayed.
