Dubai: The Financial Soundness Indicators (FSIs), an important component in the Central Bank’s financial sector surveillance point to the robust systemic strength of the UAE banking sector, according to the latest Financial Stability Report.
According to the report, the UAE banks remain highly capitalised with a capital adequacy ratio of 19 per cent as at the end of December 2013, slightly below the 21 per cent in 2012. A small decline in capital adequacy is attributed to partial or full repayment of Tier-2 capital granted by the Ministry of Finance in 2009. Tier-1 capital stood at 17.2 per cent and was more or less unchanged from 2012.
Banks continue to maintain high levels of capital to address risks such as the concentration risk in their loan portfolios and the rescheduling or restructuring of some corporate loans.
According to the Financial Stability Report, non-performing loans (NPLs) of the UAE banking sector appears to have peaked and it has started to gradually decline in the last quarter of 2013 for the first time since 2007. As at December 2013, the UAE banking system had an NPL ratio of 8.4 per cent representing total classified loans of Dh107 billion.
NPLs coverage last year was at around 90 per cent due to a gradual decline in NPLs as banks have increased provisions by a total of Dh72 billion since December 2008. This amount represents approximately close to three years of banks’ profit before the crisis or 3.9 times the stock of provisions at the end of 2008.
Despite the severity of the impact of the financial crisis on the banking sector, the report said the UAE banks remained resilient to build necessary coverage from profits.
“The provision coverage level is adequate given that NPLs do not result in full losses and do not take into account collateral held by banks. Improvement in economic performance has helped NPL levels stabilise in banks, requiring them to take less provisions to maintain their level of provision coverage,” the report said.
The overall rescheduled loans in the banking system declined by 15 per cent last year. Rescheduled loans are not classified as non-performing, and no provisions are made against these. Rescheduled loans with a bullet repayment amounted to Dh12.8 billion at the end of 2013. These loans are considered more prone to problems and are under constant monitoring from the central bank to avoid late recognition.
UAE banks had an aggregate net profit of Dh31.6 billion in 2013 compared to Dh26.5 billion in 2012. The high level of profitability of UAE banks indicates a strong internal capital generation capacity. The steady increase in banks’ profits since 2009 is largely driven by the growth of banks’ net interest margins (NIMs). The NIM (net interest income over gross interest income) increased from 56.6 per cent in 2009 to 72.4 per cent in 2013, reflecting a decline in banks funding cost over the period.
The improved ratio of demand and savings deposits to total deposits has also helped the banks to reduce the funding costs. The ratio has increased from 33 per cent in 2009 to 46 per cent in 2013.
Rising profits and stable or declining funding costs are boosting the profitability of the banking sector while non-interest expenses, essentially staff, premises and IT cost, remain well under control.
