Dubai: The UAE’s banking sector has remained largely resilient to the decline in oil prices and it impact on government finances and economic growth, according to a recent report from ratings agency, Moody’s.
Real estate and government-related entity (GRE) exposure are the main risks to banking asset quality, but macro-prudential regulations have largely cooled real estate speculative activity and will cap GRE exposure.
“We assess the banking sector risk at ‘Low (+)’, given our expectation that the sector’s capital buffers and profitability will remain strong, combined with stable funding and liquidity conditions. We expect that a modest softening in the loan performance will moderate these strengths,” said Thaddeus Best, an analyst at Moody’s.
Analysts expect that the high credit concentrations to GREs and the real estate sector will continue to pose a risk to asset quality, owing to the higher-than average historical delinquency levels in the real estate sector, combined with the leverage appetite of Dubai government-related entities.
However, new regulatory measures in the real-estate sector have reduced the scope for speculation-induced asset bubbles, while new lending regulations include caps on banks’ exposure to local governments and to government-related commercial entities.
The exposure of UAE banks to the construction and real estate sectors represented 19 per cent of their loan book at June 2017. This increases to 25 per cent of gross loans when including personal loans for business purposes.
UAE banks are expected to remain primarily deposit-funded, with moderate reliance on market funding. The cash-rich federal government and strong Abu Dhabi-based GREs are a key source of deposits, limiting the system’s dependence on confidence-sensitive market funding.
Moody’s believes the UAE government’s willingness and capacity to support the country’s banks in case of need remain very high.
“This strong support willingness assumption reflects the dominance of local banks in the domestic financial system, the concentrated nature of the banking system and the significant government shareholdings in several banks,” said Best.
The UAE banking system is unified under the UAE Central Bank, unlike the UAE’s fiscal framework, which is fragmented across governments in each emirate.
The country’s two largest banks by assets are owned by the governments of Abu Dhabi and Dubai, respectively. Absent a major reversal in Dubai real estate prices, analysts expect bank performance from Abu Dhabi and Dubai to converge gradually, following the divergence that emerged after the 2008-09 global financial crisis, with banks linked to the emirate of Abu Dhabi making a faster recovery than their Dubai peers.