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Uptick in lending and aconomic activity signal continued profitable growth for UAE banks

January 22, 2014

Standard & Poor's Ratings Services says it believes banks in the United Arab Emirates ( UAE ) have good prospects this year because of healthy economic growth and an upbeat corporate sector. "Real estate prices have been inching upward since late 2012, particularly in Dubai , and banks' credit losses are gradually decreasing," said Standard & Poor's credit analyst Engin Timucin . "Over the past six months, we've also seen signs that credit growth is picking up. We expect these trends to provide banks with another year of strong financial performance, and they support ourstable rating outlooks in the sector. "We believe the key risk factor to watch over the next 24 months will be developments relating to certain large restructured transactions," Engin added. "Potential nonpayment of these debts could increase some banks' provisioning requirements, thereby reducing their profitability." While the supply of credit continues to increase, it remains to be seen whether banks will manage to avoid the pitfalls that led to the costly boom and bust cycle in 2002-2008. Still, Standard & Poor's thinks asset quality will continue to improve, although the cost of risk is unlikely to reduce further. Banks' robust funding levels and good-quality capital should help them withstand adverse market developments, such as tighter liquidity and higher funding costs. Standard & Poor's rating outlooks for banks in the United Arab Emirates ( UAE ) are stable, in view of improving economic and business conditions in the country. With credit growth increasing, the four UAE banks S&P rates are set to deliver solid returns in 2014 The ratings agency thinks asset quality will continue to improve, although the cost of risk is unlikely to reduce further. Banks' robust funding levels and good-quality capital should help them withstand potential adverse market developments, such as tighter liquidity and higher funding costs. UAE banks' funding profiles have improved substantially over the past four years. Lending slowed to a trickle following the slump in local real estate and stock markets in 2008, and this led to a noticeable improvement in the banking system's loans-to-deposits ratio. Also, the U.S. Federal Reserve Bank (the Fed) has confirmed that it will only reduce bond purchases gradually, to $75 billion per month starting from January this year, from $85 billion . Consequently, S&P thinks financial market conditions will remain favourable. Still, there could be bouts of market volatility as the Fed changes its monetary policy. This could reduce the liquidity available to banks and make it more expensive. S&P believes, however, that UAE banks should generally remain strong because they still have only marginal net external assets. The rated banks have reported progressively lower amounts of new NPLs over the past few quarters. The proportion of NPLs to gross loans has fallen in turn, and S&P expects this trend to continue as loan growth outpaces new NPLs. The banks' ratios of credit losses to average gross loans have also been declining since their peak in 2009, in line with the slower formation of net new NPLs: The ratio was 0.7 per cent on average in the first nine months of 2013, down from 1.1 per cent at year-end 2012. However, S&P does not expect further significant declines because it expects the rated banks to keep strengthening their loss provisions and coverage levels, as they did in the first three quarters of last year.


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Source: CPI Financial


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