UAE banking sector outlook stable despite asset quality pressures: Fitch

Dubai: UAE’s banking sector outlook remains strong, supported by stable forecasts for the UAE and Abu Dhabi sovereign ratings, ratings agency Fitch said.

Among Fitch-rated banks, the sole negative outlook relates to HSBC Bank Middle East and reflects heightened uncertainty over the ultimate outcome of the Brexit process on its parent HSBC Holdings plc.

Sector outlook

“We expect the general business and operating environment for banks to remain as challenging in 2021 as in 2020," said Redmond Ramsdale, Head of Middle East Bank Ratings at Fitch. "Nevertheless, we expect real GDP to recover by 1.7 per cent in 2021 after falling by around 6.8 per cent in 2020. We expect defaults to rise as government support measures wane.”

Asset quality

Fitch expects asset quality of UAE banks to deteriorate as payment holidays expire and not all borrowers are able to weather the downturn. This is particularly true in real estate, contracting, retail, aviation and hospitality sectors.

The agency expects a spike in Stage 3 loans under the IFRS 9 reporting classification. Stage 3 loans could rise to "6.5 per cent of gross loans by end-2021 from 4.9 per cent at end-2019, which would be well above levels reached during the last oil price shock in 2014-2016," said Ramsdale. "In addition, increasing restructuring and extension of support measures until end-H1-21 masks the true increase in Stage 3 loans.”

Stage 2 loans ratios vary across UAE banks and are not yet fully comparable. But some have reached 20 per cent and above, indicating potential for high asset quality pressure.

Soft real estate

Real estate values and rents are soft. The UAE has seen price drops - slightly over 30 per cent over the last five to six years - resulting in increased loan restructuring. Oversupply is expected to continue. Lower prices also put further pressures on collateral valuation and are pushing up loan impairment charges.

Banks’ profitability is expected to continue to be hit by lower interest rates, subdued business volumes and higher loan impairment charges.

Capital, liquidity and funding

Fitch expects stable capital levels in 2021 owing to modest loan growth (3 per cent forecast) and a likely reduction in dividend payments. Funding and liquidity are expected to remain strong.

Deposits have proved behaviorally stable, although contractually short-term. High deposit concentration remains a key risk.