UAE’s Banking System Stable: Moody’s

In a new report entitled “Banking System Outlook — United Arab Emirates: Resilient Buffers Drive Stable Outlook Despite Continued Economic Slowdown,” global ratings agency Moody’s Investor Service (MIS) lists its current outlook for the United Arab Emirates (UAE) banking system as “stable”, reflecting its view that “resilient capital and liquidity buffers” will continue to aid and protect the credit profile of banks in the Emirates. The outlook also expresses Moody’s expectation of how bank creditworthiness within the UAE  will evolve over the next year to 18 months.

“The solid profitability and capital of the UAE banks will provide protection against rising problem loans,” Nitish Bhojnagarwala, assistant vice president and analyst at MIS said. “At the same time, sufficient liquidity will cushion against any reduced flows of government deposits as lower oil prices impact government revenues.”

The agency expects real GDP growth in the UAE to come in around 2.5% and 1.9% for 2016 and 2017, respectively, down from 3.2% in 2015. This economic slowdown will lead to modest increases in new problem loan formation,Moody’s says, particularly in the over-leveraged small and mid-sized company (SME) and retail (loans to individuals) segments.

Profitability, however, will remain strong across the UAE, and the agency is now expecting a “broadly stable return” on assets at around 1.7% over the current outlook horizon. And although funding costs and provisioning costs will likely increase, MIS expects them to be offset by rising corporate yields combined with loan growth (subdued at 3%-5%) and modest efficiency gains.

“We expect problem loans to increase modestly to around 5.5% of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6% to around 5% currently,”explains Mr. Bhojnagarwala.

Capital buffers are likely to improve in the Emirates and tangible common equity (TCE) is also expected to increase modestly to around 15% of risk weighted assets (RWAs) by 2017, up from 14.3% as of December 2015. Loan reserves stood at 94% of problem loans as of June 2016, the rating agency expects this level of coverage to continue. Also,  government support for UAE banks will likely remain high, with the government continuing to be willing to provide financial support should it become necessary, despite any ongoing fiscal pressures from falling oil revenues.

“The reliance on market funding for UAE banks’ is expected to increase as deposit growth continues to decelerate”, adds Mr. Bhojnagarwala. “However, the liquidity buffers remain strong, despite a modest decline, with liquid assets expected to remain around 25% of total assets”.