Moody's forecasts subdued bank lending in UAE

Rating agency maintains negative outlook; says Dubai bad loans to hit 15% in 2012

Moody's Investors Service said it is maintaining its negative outlook on the UAE's banking system because of ongoing trends of corporate deleveraging, asset quality challenges and subdued profitability.

The negative outlook reflects the rating agency's expectations for the fundamental credit conditions in the banking system over the next 12-18 months, Moody's said in a new report.

Overall, the rating agency said it expects bank lending growth to remain subdued over the remainder of 2011 at around 3-5 percent, compared with 25 percent in pre-crisis times.

Among Abu Dhabi banks, Moody's said it expects stronger economic growth to generate higher lending growth compared with Dubai banks.

"Moody's negative outlook on the UAE banking system is mainly driven by the legacy asset quality challenges related to the ongoing restructuring of some large government-related borrowers," said Khalid Howladar, senior credit officer at Moody's Dubai office.

"Limited transparency, sizeable related-party exposures and high loan and deposit concentrations will also continue to render many UAE banks vulnerable to name-specific risks," he added.

Moody's added that it believed the UAE's dependence on oil revenues and core sectors of trade, services, global logistics and tourism could render the local economy "more sensitive to global risk scenarios of weakened growth and recession".

While it saw government spending continuing to benefit banks over the outlook horizon, particularly in Abu Dhabi, it added that real estate oversupply and weaker business confidence will dampen the speed of recovery in Dubai.

"The orderly conclusion in June 2011 of the $25bn Dubai World corporate debt restructuring has been a critical step forward for banks' asset quality and the economy," said Howladar.

He added that there remained some uncertainty surrounding the ongoing restructuring discussions about the $10bn distressed debt of Dubai Holding entities.

The rating agency said it expects work-outs of large distressed government-related issuer (GRI) exposures to continue pushing up system-wide non-performing loans, which are likely to peak at around 13-15 percent in Dubai next year and around 8-10 percent in Abu Dhabi this year.

Moody's view of bank asset quality also incorporates the depressed state of the real estate sector, Howladar said.

On the positive side, Moody's said UAE banks have increased their capital over the past two years while shareholder's equity is also relatively high on a global basis.

Moody's also said it considers UAE banks' liquidity metrics to have significantly improved.

Although profitability is recovering, it remains constrained by cautious loan growth and the ongoing provisioning that is required to cover problem loans, the Moody's report added.

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