By Babu Das Augustine, Banking Editor
Dubai: Prolonged low oil prices have resulted in a slowdown in the UAE's economic growth from 4 per cent last year to a projected 2.3 per cent in 2016, according to the International Monetary Fund (IMF). Despite the continued growth slowdown rating agency Moody's said its outlook for the UAE banking system is stable.
"Our outlook for UAE's banking system remains stable, unchanged since 2013. In our view, the country's banks will maintain stable credit profiles despite a slowing economy and subdued demand for credit caused by low oil prices, said Nitish Bhojnagarwala, assistant vice president -- analyst at Moody's.
The banks' solid profitability and capitalisation levels are expected to provide protection against rising problem loans, while sufficient liquidity will cushion against reduced flows of government deposits into the banking system as lower oil prices impact government revenues, according to Moody's.
While the operating environment for banks is expected to soften, the rating agency expects GDP (gross domestic product) growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017. Reduced public spending is expected to soften the demand for credit resulting in domestic credit growth to slow to around 3 to 5 per cent annually for 2016 and 2017, down from around 8 per cent for 2015.
Apart from the underlying economic dynamics, the rating agency believes that the continued geopolitical tensions in the region pose tail risks to its forecast and the prospect of a more protracted period of low oil prices, below its current forecast of between $40 and $60 per barrel for 2016 and 2017 that could further dampen confidence, future spending and economic growth.
Asset quality is seen weakening modestly after a period of strong recovery. "We expect problem loans to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around 5 per cent currently. We expect rising problem loan formation in the small and mid-sized company and retail (loans to individuals) segments, although continued resolution of legacy problem loans will offset some of this increase," Bhojnagarwala said.
The rating agency expects downside risks to banks could stem from the sizeable and volatile real-estate sector and from concentrated exposures to large government related institutions.
For the banking sector as a whole capital buffers are expected to improve further form internal capital generation, combined with subdued asset growth. Loan-loss reserves were a solid 94 per cent of problem loans as of June 2016.
Profitability is expected to remain at current strong levels despite rising funding costs and provisioning expenses.
Moody's expects continued strong core profitability to drive a broadly stable return on assets at around 1.7 per cent over the outlook horizon. "Although funding costs will continue to increase, we expect they will be offset to a large extent by rising corporate yields as a result of an easing of highly competitive lending pressure, re-pricing of assets to transfer the increase in funding costs, and the positive impact of any US interest rates rises," Bhojnagarwala said.
Overall margins are expected to remain stable at around 2.5 per cent. Combined with loan growth of 5 per cent and efficiency gains, this will deliver a modest pre-provision income growth and offset to a large extent the expected increase in provisioning charges.
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