Strong banking sector to address funding challenges

Dubai: Full year data from the leading UAE banks indicate that the banking system in the country is strong enough to withstand the potential economic pressures from oil price decline, Garbis Iradian, Deputy Director of Institute of International Finance (IIF), told Gulf News in an interview.

Data from the IIF, the Washington-based global association of financial institutions show the soundness indicators of the UAE banking system have further improved this year with strong improvement in capitalisation levels, increase in profitability and further improvement in loans and deposits growth.

“Key indicators such as capital adequacy ratio, non-performing loans (NPLs), provisions, loans and deposit growth and loans and deposit ratios for banks point to the fundamental strength of the banking system and their ability to withstand, the potential impact of a small slowdown in the economy as a result of the decline in oil prices,” said Iradian.

The IIF estimates that with an average oil price of $98 a barrel for 2014, the country’s GDP growth is estimated at 4.4 per cent with hydrocarbon sector growing at 3.3 per cent while non-hydrocarbon sector growing in excess of 5.5 per cent with a fiscal surplus of 7.1 per cent of the GDP.

With the slowdown in oil prices the IIF official said, the UAE and all other GCC countries will witness decline in GDP growth, current account balances and fiscal balances. According to the IIF estimates, even if the oil price is to average at $60 a barrel in 2015, the UAE’s GDP should grow by about 3 per cent and in the worst case scenario of oil averaging at $50 a barrel, the IIF estimates that the GDP growth will be about 3.3 per cent.

“We do not expect the modest growth impact to translate into a big decline in credit growth or a sharp increase in NPLs as the bank’s are adequately liquid and the balance sheets are strong with low NPL ratios and provisions in excess of 115 per cent,” said Iradian.

Problem loans have declined in parallel with recoveries, write-offs and improved corporate profitability. Additionally the recent restructuring of Dubai World Group’s (DWG) second round of $14 billion debt restructuring has benefited a number of banks to reclassify their exposures from NPLs to performing loans.

The terms of the second restructuring broadly include an early repayment of the 2015 tranche of $2.96 billion; an extension of the 2018 tranche of $11.7 billion to 2022, with an amortising repayment structure; an enhanced security package; and commercial coupon rates.

According to rating agency Moody’s projections, the reclassification of the restructured DWG debt brings UAE’s asset quality and coverage of problem loans by loan loss provisions closer to that of the GCC average. “UAE banks’ non-performing loans to gross loans ratio is expected to fall substantially to around 6 per cent at year-end 2014 from 9.2 per cent in December 2013 — a credit positive for the UAE banking system,” said Nitish Bhojnagarwala, Senior Analyst at Moody’s.

Analysts expect that the increased profitability banks will boost internal capital generation, maintaining banks’ strong Tier 1 capital levels at around 16 per cent this year. In addition to the shock absorption capacity provided by these robust capital metrics, the cash-rich federal government and stronger Abu Dhabi-based government related entities are expected to continue to remain a key and stable source of deposits, limiting the system’s dependence on confidence-sensitive market funding.

“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.