Dubai: The UAE’s banking sector and the financial system remains resilient despite the global and regional economic challenges, according to the latest Financial Stability Report (FSR) of the Central Bank of the UAE (CBUAE).
The report said the UAE banking system concluded the year 2019 in a resilient position with adequate capital and liquidity buffers well above regulatory requirements. The banking system remained profitable due to the effectiveness and improved cost efficiency benefitting from efficiency gains related to recent mergers in the sector.
Ready to withstand COVID-19 impact
During the first quarter of 2020, the outbreak of the COVID-19 pandemic changed the outlook for global and domestic economic activity, posing challenges to the operating environment of the banking sector. However, our stress tests demonstrate that the UAE banking sector is able to withstand macro-financial shocks of any size.
The United Arab Emirates retains financial and economic stability in an ever changing and stressed global macroeconomic environment, with the Central Bank of the UAE being the anchor of monetary and financial stability in the country.
“The United Arab Emirates retains financial and economic stability in an ever changing and stressed global macroeconomic environment, with the Central Bank of the UAE being the anchor of monetary and financial stability in the country,” Abdulhamid Saeed, Governor of the Central Bank of the UAE.
The government of the UAE and CBUAE have taken a wide range of measures to mitigate the adverse impact of COVID-19 pandemic and launched substantial financial programmes to help affected individuals and corporates and the economy at large.
In addition, the temporary measures introduced by the CBUAE included the IFRS 9 guidance and prudential filters that were designed to ensure financial and prudential reporting of financial institutions adequately, reflect the COVID-19 operating environment.
Stable lending & deposits
Based on the most recent data, the central bank report said, the aggregate lending and deposit growth remain stable and the banking sector in the country holds good level of liquidity and capital. The Capital Adequacy Ratio was 16.9 per cent as of end March 2020 and the Eligible Liquid Asset Ratio was 16.6 per cent as of end May 2020, well in excess of the minimum regulatory requirements.
“The Financial Stability Report demonstrates a robust and resilient banking system in the UAE. The banking system proved its ability to face the consequences of COVID-19 pandemic and perform its role in supporting the economy, further reinforced by the CBUAE’s proactive Targeted Economic Support Scheme reaching Dh256 billion since its launch, but we shall remain vigilant and take the necessary and appropriate measures to further support the UAE’s economic growth,” said Saeed.
Despite the resilience of the overall banking sector, the challenges posed by the COVID-19 pandemic will affect banks operating environment in 2020. “The global challenges posed by the COVID-19 pandemic must not be underestimated. During 2020, the world economy and financial system will be faced with significant challenges posed by the COVID-19 pandemic,” the report said.
Asset quality, on the other hand, represented a challenge with an increase in non-performing loans ratio although partially mitigated by good provisioning levels.
During the year, bank lending continued to grow at a steady rate, although its distribution was not broad-based. Retail lending registered a decline, while credit to certain sectors such as real estate and construction continued to grow, supported by improved affordability due to declining real estate prices. International exposures of the UAE banking system increased during 2019 underpinned by cross-border acquisitions and diversification in terms of foreign debt securities.
The finance companies sector recorded a decline in total assets with profitability and cost-efficiency remaining under pressure in a challenging operating environment.
Overall liquidity and capital ratios of the finance companies sector remained adequate and specific provision levels improved, with some notable differences between individual finance companies. The size of the finance companies sector represented only about one percent of the banking system.
The CBUAE report said banks’ asset quality have slightly deteriorated as moderate increases in non-performing loans (NPLs) persisted throughout 2019.The banking system remained profitable with improved cost efficiency that benefited from mergers in the sector. Despite the resilience of the overall banking sector, the report warned that the challenges posed by the COVID-19 pandemic will affect banks operating environment in 2020.
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