Optimistic outlook for UAE banks despite lower oil prices and global economy worries

UAE banks play an invaluable role in promoting the diversification of our economy, supporting small entrepreneurs as well as international companies, while also providing safe and sophisticated products and services to individual customers. The banks are helped in this by a supportive UAE Central Bank and a vigilant government, which has created an enabling environment for the development of a stable and disciplined financial sector that contributes positively at every level of the broader economy.

Whilst the UAE economy remains resilient, the weakness in oil prices, the slowdown in Europe, China and other emerging markets, volatility in local and global stock markets and depressed real estate prices have all contributed to tightening of liquidity, not just in the UAE but across the GCC. There are also indications of a deceleration in financing growth, pressure on spreads and a deterioration in credit quality. Although the banking sector’s fundamentals remain strong, the impact of lower oil prices and subsequent decline in government revenues cannot be ignored.

As a consequence, UAE banks have become more risk-averse. The reduced willingness to extend business financing, despite strong demand, is evident in the tightening of credit standards around collateralisation and the premiums charged for high-risk borrowing. In my view, this is a prudent step which in the short term could cause some pain for a section of borrowers, but over the long term will prove to be beneficial.

Despite the signs of fiscal caution, there is no need to press the panic button. The government is committed to spending on infrastructure projects, albeit at a lower level; the economy continues to diversify, with non-oil companies contributing substantially to employment and GDP growth. Liquidity in the banking sector is still healthy and the government has adequate means to manage it. The sector is well capitalised, as per global standards, and has an overall capital adequacy ratio of 18.2 per cent, which is significantly higher than the requirement of 12 per cent.

Regulatory environment

UAE banks have reduced their dependence on offshore funding vehicles and tightened controls on lending to real estate development. They are also dealing strongly with non-performing financing portfolios and a strong regulatory environment has helped in this regard. The Central Bank has imposed financing caps, mandating a higher proportion of liquid assets on bank balance sheets and continues to discourage speculative financing to property “off-plan flippers”. Also, in its new set of regulations, the Central Bank has put heavy responsibility on the board of directors of financial institutions, who now have been tasked with closely keeping an eye on day-to-day operations of the bank. A bank’s board of directors will have to ensure all sorts of future risks are fully covered, liquidity is managed at all times and contingency plans are ready.

The lessons of 2008-9 have been learnt and substantial protective measures have been, and continue to be, put in place to shield the UAE banking system from being at risk again.

One consequence of the global crash of 2008-9, was the sharp increase in delinquent debt held by UAE banks which resulted in large balance sheet write offs caused by a failure to recover monies owed. Those worst affected in the UAE were SMEs, the backbone of our economy. It was clear then, as it is now, steps had to be taken not only to protect the vulnerable SME sector but also the banks’ and investors’ ability to recover finance facilities. For this reason, the UAE Banks Federation (UBF) and policymakers are supporting the creation of bankruptcy laws designed to protect banks, investors and SMEs. Not everyone succeeds first time out. Failure happens. What is important is that those who fail can pick themselves up, dust themselves down and start over again.

Protection

The proposed legislation — the faster it is implemented the better it is — would allow this to happen by giving greater protection to defaulters, while at the same time helping banks and investors to recover their money. Essentially banks and their customers are partners and workable solutions have to be found to ease the stress and both are working towards it. The UBF Wholesale & SME Committee is in the process of creating a framework on steps needed to improve overall market conditions and is in discussions with regulators regarding updates to legislation, and agreement on the process for dealing with “skips” and stress cases.

It is clear, therefore, that while the UAE is not immune to the shadow over the global economy, the situation, as we look forward to 2016, is very different from that in 2008-9. In the intervening years, with the help and guidance of the Central Bank, the UAE banking industry has largely cleaned up its act. Much of the poison, in the form of bad debt, has been flushed from the system and has been replaced by a more considered and mature approach to lending. This, coupled with larger cash buffers and a more customer centric approach, means the UAE’s banking sector is in a much better place than it was in 2008. While we should not be blind to any warning signs, there is every reason to be optimistic that 2016 will see the UAE banking sector continue to deliver solid results as it provides the fuel that will help drive the nation’s growth.

Hussain Al Qemzi is CEO of Noor Bank.