Dubai: Credit rating agency Moody’s has maintained a stable outlook for the UAE’s banking system as the banks benefit from strong capital, stable funding and healthy liquidity that balance weakening asset quality and softening profitability.
“The outlook for the UAE’s banking system remains stable as banks’ credit profiles are resilient. Banks’ strong capital, stable funding and healthy liquidity balance weakening asset quality and softening profitability amid steady but subdued economic growth,” said Mik Kabeya, an analyst at Moody’s.
Moody’s expect economic growth to remain stable, although at subdued levels. Opec production cuts are expected to constrain hydrocarbon economic growth, while slowing global trade, moderate oil prices, strong currency (given the peg between the local currency and the dollar) and geopolitical tensions weigh on the non-oil economy.
The rating agency has forecast UAE’s real GDP growth at1.7 per cent for 2019 and 1.4 per cent in 2020, compared with 1.7 per cent in 2018, well below the 4.8 per cent annual average during 2011-16.
Amid slower economic growth, Moody’s analysts expect credit growth of 4 per cent in 2019 and 2020, compared to 4.3 per cent in 2018.
Loan performance is expected to weaken this year and next. “Problem loan formation will increase as the subdued economic growth means corporates will face lower business volumes and margin compression, while personal borrowers see limited wage growth,” said Kabeya.
UAE banks, according to Moody’s are likely to face further deterioration in asset quality in the future as the ongoing renegotiation and restructuring of large corporate debt will limit the reported problem loan formation, but noticeably increase the potential for future formation.
According the rating agency’s estimates, the problem loans to gross loans ratio will increase to 4.8 per cent to 5.3 per cent in 2019-20, compared to 4.6 per cent as of June 2019 and a peak of 10.6 per cent in 2011.
Strong profitability and capitalisation levels are expected to cushion risks related to weakening asset quality. “Strong capital provides sizeable loss-absorption potential. We expect solid profitability to support sector-wide tangible common equity (TCE) at 14 per cent to 16 per cent of risk weighted assets over the next 12 to 18 months, from 14.4 per cent at June 2019,” he said.
Moody’s expect even moderate oil prices will be sufficient to support the revenues of government-related entities and corporates, which will contribute to stable funding and liquidity conditions. UAE banks will remain primarily deposit-funded, with limited recourse to confidence-sensitive capital markets.
Amid lower interest rates environment UAE banks expected face margin pressure. “Lower rates will reduce net interest margins because gross yields earned on loans will decline more than the funding cost paid on deposits. Operating expenses will remain broadly stable. Loan-loss provisioning will gradually increase due to the subdued economy,” said Kabeya.