Moody's bearish on UAE banking growth

Dubai: Global credit rating agency Moody's said yesterday that the UAE's banking sector is expected to face deterioration in asset quality and profitability in 2009.

"The credit outlook for the banking sector of the UAE is negative, reflecting growing pressures in the operating environment," Moody's Investors Service said in its new Banking System Outlook on the UAE.

"Moody's is mainly concerned about the loans to 'opportunistic' developers that have been extended over the past four to five years following Dubai's decision to allow freehold ownership for foreigners in 2003," said John Tofarides, a Moody's analyst and author of the report.

The compounded annual growth rates of loans in the UAE banking sector was 37 per cent over the past four years.

However, given the mounting pressure from liquidity shortages in the market and rising funding costs, the projected asset growth for 2009 is expected to be considerably lower.

The UAE central bank governor said in early December that loan growth is expected at levels of 5-10 per cent in 2009.

Moody's expects the tight liquidity situation in the market to have severe consequences for future asset growth and profitability of the banking sector.

The rating agency observes that liquidity management remains a major challenge for the UAE banking sector as banks use short-term deposits and interbank lending to finance long-term assets.

The dirham's dollar peg contributed to a surge in loans and advances as a result of cheap credit, positive capital market expectations and an energetic property market. Following the global liquidity crunch, debt capital markets were severely disrupted.

The outflow of speculative deposits has brought credit growth, which had a compounded annual growth rate of 37 per cent over five years to a standstill.