High lending concentrations and exposures to large corporate and government related issuer restructurings will continue to leave banks more susceptible to event risks said the report.
Dubai — The outlook for the UAE banking system remains stable, unchanged from 2013, Moody's Investors Service said in its latest report. The outlook reflects Moody's expectation of continued improvements in the operating environment supporting further reduction in problem loans, a modest increase in banks' profitability, and the maintenance of strong capital buffers and ample liquidity, the ratings agency in a report published on Wednesday.
However, high lending concentrations and exposures to large corporate and government related issuer restructurings will continue to leave banks more susceptible to event risks said the report, "United Arab Emirates: Banking System Outlook."
"Over the next 12-18 month outlook period, we expect continued robust public spending particular in Abu Dhabi and strong growth in Dubai's more diversified private sector to support real GDP growth of over four per cent annually in both 2014 & 2015. This economic growth combined with increased confidence will support credit growth of 7 per cent- 10 per cent annually for the banking system," said Nitish Bhojnagarwala, a Moody's assistant vice president.
"As a result of this economic recovery, tighter underwriting and continued settlements, recoveries and commercial restructurings, we expect asset quality to improve with problem loans to gross loans to further decline to around seven per cent levels from the nine per cent system average at December 2013," said Bhojnagarwala. "Although the risk of oil prices remaining well below the UAE's fiscal breakeven price (estimated by the International Monetary Fund at $84 a barrel) for a sustained period would dampen confidence, future spending plans and economic growth, we expect average oil prices to remain in the $80-85/barrel over 2015 and also consider that the government maintains ample financial resources to support countercyclical measures over the outlook horizon," said Khalid Howladar, a Moody's vice-president-senior credit officer.
Saeed Abdullah Al Hamiz, UAE Central Bank's assistant governor for banking supervision said banks in the UAE recorded stronger growth rates in lending, deposits and assets in the first nine months of 2014 vis-a-vis the average rate of growth posted during the past three years. "While the loan books of UAE banks on a gross basis grew faster at eight per cent to Dh1.38 trillion in the first nine months, surpassing the average five per cent annual surge during 2010-13, deposits jumped 11 per cent to Dh1.41 trillion during the three-quarter period compared to the three-year average increase of seven per cent," he said.
Moody's expects the continued easing of problem loans to drive lower loan-loss provisioning, which when coupled with asset growth will support a modest increase of returns on assets to around two per cent over the outlook period. "This performance will help to offset some of the weaknesses in top line profitability, which continues to be affected by margin pressures, given the low interest rate environment and an increasingly competitive business environment," said Khalid Howladar.
Moody's said in addition to the shock absorption capacity provided by these robust capital metrics, it alsoanticipates that the banking system would maintain its strong funding and liquidity profiles over the outlook period. "The cash-rich federal government and stronger Abu Dhabi-based GRIs will continue to remain a key and stable source of deposits, limiting the system's dependence on confidence-sensiti market funding. The strength of the UAE banks' liquidity is reflected in the banking system's liquid assets-to-total assets ratio of around 30 per cent as well as a loans-to-deposit ratio of 91 per cent as of December 2013 (down from 108 per cent in December 2008).
"We expect that UAE authorities will continue to remain highly supportive of local banks over the outlook period, reflecting both the high capacity and willingness of the government to support the banks and other non-retail deposit taking institutions. In the last 35 years, all situations involving bank distress in the UAE have been resolved without depositor or bondholder losses. Unlike the rest of the GCC no timeline has yet been announced regarding Basel III implementation or with regards to the Central Bank of UAE's (stance on bank resolution regimes," said the report.
The modest increase in profitability will boost internal capital generation, maintaining bank's strong Tier 1 capital levels. UAE banks' capital buffers also remain resilient in Moody's low probability adverse scenario. In addition to the shock absorption capacity provided by these robust capital metrics, Moody's also anticipates that the banking system will maintain its strong funding and liquidity profiles over our outlook period. The strength of the UAE banks' liquidity is reflected in the banking system's stable liquid assets-to-total assets ratio of around 30 per cent and loans-to-deposit ratio of 91 per cent as of December 2013.
(c) 2014 Khaleej Times. All Rights Reserved. Provided by SyndiGate Media Inc. (Syndigate.info).