Dubai: Bank credit to the private sector has started to recover while higher oil revenues have also increased government deposits, further supporting the banking system’s liquidity and private credit growth, according to a recent IMF assessment of the UAE banking system.
“While the nonoil output and credit gaps remain, negative credit growth has been recovering, especially to construction, trade, and manufacturing, since the third quarter of 2017, supporting prospects for the recovery of non-oil growth,” the IMF’s latest staff report said.
According to the IMF, the UAE’s bank profitability, liquidity, and capital buffers remain strong, despite an uptick in non-performing loans (NPLs). Bank profitability has improved, reflecting higher interest margins largely driven by repricing of loans in a rising interest rate environment.
Overall, the capitalisation levels of UAE banks remained strong last year with the capital adequacy ratio has remained above 18 per cent. Wholesale funding, mostly at medium-term maturities, edged down to below 13 per cent of total funding by second quarter 2018, in part owing to rising US interest rates.
Bank liquidity has improved further with increased oil prices. With the economy recovering only gradually, NPLs rose, reaching 7 per cent of total loans in the second quarter of 2018 (from 6.4 per cent at end-2017). The IMF report noted that while small and medium enterprises (SMEs) and households led the NPL increases in 2017, the latest increase was mostly driven by GREs and other large corporates. Despite the increase, NPLs remain fully provisioned. Transition to IFRS9 [International Financial Reporting Standard 9] has also prompted banks to increase provisioning, although it has not had an apparent impact on NPLs.