The impact of COVID-19 pandemic and last year’s oil price crash on the UAE’s banking sector was largely mitigated by robust government support, according to rating agency Standard & Poor’s. Image Credit: Gulf News Archive

Dubai: The impact of the pandemic and last year’s oil price crash on the UAE’s banking sector was largely mitigated by robust government support, according to Standard & Poor’s. The crisis did not affect all GCC banking systems in the same way, highlighting the resilience of some.

According to the rating agency, in the early days of the pandemic, the most vulnerable banking sector in the GCC was the UAE's, as key sectors such as the hospitality, trade, and an already-weak real estate sector were upended. However, S&P believes this was largely mitigated by the government’s support schemes.

Targeted support

The Central Bank's Targeted Economic Support Scheme (TESS) offered breathing room to corporates hit by the pandemic and reduced costs for banks by providing free funding. “The TESS was extended until June 2022, meaning we now expect the banking system to amortize the impact of the pandemic over a longer period,” said Zeina Nasreddine, a credit analyst with S&P.

UAE banks’ performance was slightly better in first-half 2021 than first-half 2020 on the back of lower cost of risk, in part due to large provisions taken by banks for one-off cases in 2020. “The extension of TESS has given corporates impacted by the pandemic more breathing room to restore their financial profiles," the analyst said. "At the same time, the macroeconomic environment has started to improve thanks to higher oil prices and strong vaccination rates.” 

S&P expects the trend to continue in the second half, with banks posting slightly better results for full-year 2021.

Asset quality

“We expect asset quality to remain weak over the next 18 months," said Nasreddine. "The extension of TESS measures including the requirement that banks not classify exposures as nonperforming if the borrowers suffered from cashflow pressures related to the pandemic - means the actual extent of asset quality problems is not fully visible on banks’ balance-sheets.”

At close of second quarter 2021, Stage 3 loans [under IFRS 9 classification] as a percentage of gross loans stood at 6 per cent, compared with 6.1 per cent at year-end 2020. Stage 2 loans stood at 7.2 per cent for the first-half. “We anticipate that NPLs will peak in 2022 once forbearance measures are lifted and banks start recognizing the full extent of asset quality problems,” said Nasreddine.

The UAE government has been highly supportive of its banking system throughout various past crises, injecting the necessary liquidity and capital support when needed. The Central Bank said last week that it is committed to the full recovery of the economy and the withdrawal of the support measures will be gradual.