Report hints at increased loan formation for SMEs as economy recovers with higher oil prices and government spending
The UAE’s banking system is stable and reflecting a gradually recovering economy, according to the Banking System Outlook report by Moody’s.
The report says banks' strong capital, resilient profitability and solid funding are the main reasons for the stable outlook, which also hints at increased loan availability for SMEs.
"Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers," said Mik Kabeya, assistant vice president at Moody's.
Rising oil production, government infrastructure spending in Dubai and a fiscal stimulus package in Abu Dhabi will play key parts in Moody's forecasted GDP growth of 2.2% in 2018 and 2.9% in 2019. This follows a 0.8% slowdown in 2017, but the recovering economy is expected to stimulate credit growth.
Bank’s strong capital levels will provide a loss-absorbing buffer for the UAE's banks, and Moody's expects strengthening profitability to support capital levels. Sector-wide tangible common equity (TCE) are at 14%-15% of risk-weighted assets over the next 12 to 18 months, according to the report.
Moreover, profitability will marginally improve due to rising interest rates supporting net interest margins. Banks will raise their lending rates and result in higher loan yields slightly outweighing the higher rates they will need to pay on deposits.
However, operating expenses will remain largely stable, while loan-loss provisioning will gradually stabilise as the economy recovers and higher oil prices continue to support solid funding and liquidity.
"UAE banks will remain primarily deposit-funded, with only a moderate need to turn to confidence-sensitive capital markets" said Mik Kabeya.
Banks in the UAE have enough liquidity headroom to experience a pick-up in credit growth, though the government’s willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.