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Credit rating agency Moody’s sees a strong post-pandemic recovery for the UAE’s banking sector supported by the economic recovery. Image Credit: Ahmed Ramzan/Gulf News

Dubai: Credit rating agency Moody’s sees a strong post-pandemic recovery for the UAE’s banking sector supported by the economic recovery.

The rating agency has affirmed the credit ratings of eight banks and have changed the outlook of these banks from negative to stable in its latest rating update.

“Moody’s view that the operating environment for the UAE banks is recovering from the effects of the pandemic. This is expected to support the banks’ financial fundamentals, particularly profitability, capital and liquidity,” the rating agency said in its update.

Strong support

The latest rating affirmations also consider the UAE central bank’s support package relating to the coronavirus pandemic, which has supported the country’s economy and consequently helped the banks mitigate loan quality deterioration.

The UAE banks’ profitability is expected to recover owing to a reduction in provisioning charges, with net income to tangible banking assets recovering to around 1 per cent during first six months of 2021 from 0.8 per cent for 2020,” Moody’s said.

The rating agency expects the improving profitability to support the banks’ capital, which is expected to remain stable at the current strong level with tangible common equity to risk weighted assets at around 13.8 per cent as of June 2021 while liquidity buffers which also remained strong with liquid assets to total assets at around 37 per cent as of June 2021.

Economic growth

The change of outlook to stable from negative takes into account the expectation of ongoing recovery in the UAE’s operating environment. The rating agency expects, the overall UAE real GDP to grow by 2.8 per cent and 5.4 per cent during 2021 and 2022 respectively, from a 6.1 per cent decline during 2020.

Moody’s said the economic growth of the UAE will be driven by robust non-hydrocarbon GDP growth of 4.8 per cent and 4.1 per cent during the same period supporting the recovery across the core sectors of the economy such as transport and tourism which were severely hit in 2020 due to the social and travel restrictions imposed during the pandemic. This combined with increase in oil prices -- the rating agency expects medium-term oil price range to $50-$70/barrel -- will support both businesses and confidence in the operating environment which in turn will support the UAE banks’ financial fundamentals.

The affirmation of the long-term ratings of Abu Dhabi Commercial Bank (ADCB), Abu Dhabi Islamic Bank (ADIB), Commercial Bank of Dubai (CBD), Dubai Islamic (DIB), National Bank of Furjairah (NBF) and RAKBank, HSBC Bank Middle East Limited (HBME) and Mashreq incorporates Moody’s continued ‘very high’ assumption of support from the Government of UAE resulting in the same uplift.

The rating agency’s government support assumption takes into account UAE’s strong track record of supporting banks in case of need.

The stable outlook on the bank’s long-term issuer ratings reflects the rating agency’s expectation that pressure on the bank’s asset quality will be balanced by recovering profitability combined with strong capital and liquidity buffers.