Post COVID-19: UAE banking sector remains resilient to global challenges
Banking sector recorded significant gains on key indicators last year, says Central Bank
Dubai: The UAE’s banking sector remains strong and resilient despite several challenges posed by global economic developments last year, according to the 2019 annual report of the Central Bank of UAE (CBUAE).
“Despite the turbulent external environment, the UAE’s banking sector remained sound in 2019 with strong levels of capital and liquidity,” said Abdulhamid Saeed the Governor of CBUAE, in his message in the 2019 annual report.
The Governor said the banking sector will be facing a more challenging 2020. “The outlook is uncertain, marked by the global impact of the COVID-19 pandemic, both in terms of human lives, health and the economic activity,” said Saeed.
“The strength and resilience of the banking sector will be tested, and the CBUAE shall continue to play its role in terms of guiding the banking sector through this period, with active intervention in various facets ranging from liquidity, capital adequacy and other policy measures to ensure we continue to help the business environment in the UAE, with a special focus on small and medium enterprises.”
Balance-sheet growth
The UAE’s banking sector witnessed major progress on consolidation last year with 7.5 per cent growth in gross assets to Dh3.08 trillion. Total credit grew 6.2 per cent to Dh1.75 trillion compared to 2018's Dh1.65 trillion. For underlying domestic credit, the lending growth was mainly driven by lending to the government sector, which increased by 34 per cent as well as to government-related entities, which rose 10 per cent.
Islamic banks have a share of 18.6 per cent of total assets and 20.8 per cent in total gross financing.
Total domestic credit grew 5.5 per cent to Dh1.59 trillion. Despite the decline in lending to individuals, the increase in credit to private corporates led to a rise in overall credit growth to the private sector. The sectors with the highest year-on-year growth were manufacturing; electricity, gas and water; transport, storage and communication, and financial institutions (excluding banks).
The sectors experiencing a decline in credit at the end of 2019 were agriculture, mining and quarrying, construction and real estate and trade.
On the liability side, customer deposits were higher by 6.5 per cent to Dh1,87 trillion. Almost 90 per cent of total deposits are held by residents. The increase in resident deposits was essentially due to the change in private sector deposits, which increased by Dh48.5 billion, in addition to the rise in GRE deposits by Dh36.6 billion.
Deposits by the type of banks - i.e., conventional vs. Islamic banks - represent 78.5- and 21.5 per cent of total deposits at the end of 2019. Meanwhile, the share of national and foreign bank deposits represents 88.6 per cent and 11.4 per cent, respectively.
Asset quality
For 2019, the UAE banking sector reported a net non-performing loan ratio of 2.4 per cent.
The CBUAE continued to evaluate banks’ management of credit, liquidity and capital related risks through its annual banking system stress-test exercise to ensure the resilience of the banking sector. All UAE national banks and four foreign banks participated in the stress test.
The results of the stress tests served as an input to banking supervision and their supervisory actions where relevant. In addition, the CBUAE conducted thematic stress tests focusing on liquidity and government-related enterprises (GRE).
Financial soundness
According to the report, banks remain well capitalised, with an average capital adequacy ratio (CAR) of 17.7 per cent, Tier 1 capital ratio at 16.5 per cent, and common equity Tier 1 ratio (CET 1) at 14.7 per cent by end 2019.
The loan-to-deposit (L/D) ratio for the whole banking system decreased slightly to 94 per cent by December. Eligible liquid assets, as a ratio of total liabilities, increased to reach 18.1 per cent at the end of 2019. This level of liquid assets constitutes an adequate buffer as it is well above the 10 per cent regulatory minimum required by the CBUAE.
The level of total liquid assets at banks as at the end of December stood at Dh455.9 billion, or Dh48.3 billion higher compared to end 2018, which corresponds to a 12 per cent increase.
The third quarter also saw the acquisition of a Turkish bank by a UAE bank. The total number of banks comprises 21 national and 38 foreign banks, including 11 wholesale banks.
The Central Bank's annual report shows that national banks continued to reduce their branches, which declined to 656 at the end of December compared to 743 the previous year. The number of employees in national and foreign banks declined to 35,637 in December 2019.