Fitch Ratings said on Tuesday it believes that the weak global economy and slowdown in Abu Dhabi will represent "new headwinds" for the UAE banking system.
The rating agency said the UAE operating environment was "not immune" to global issues while ongoing problems in Dubai government-related entities would "continue to pose significant asset quality challenges for the sector".
Fitch said is expected several key economic sectors, such as trade, tourism and services to be negatively impacted.
Abu Dhabi has been cutting its spending on construction-related projects, owing to concerns about the significant oversupply in the real estate market, an increase in the Emirate's financial commitments, and the slowdown in the global economy.
Key projects remain in the pipeline, but some contracts have been delayed or possibly cancelled, as the Abu Dhabi government has prioritised major infrastructure projects.
Fitch said it viewed this as positive and to benefit the economy in the long-run.
"However, this sharper-than-anticipated slowdown in the construction sector in Abu Dhabi could have some implications for the banks' asset quality in the short-term," Fitch said in a report.
"The significant increase in the renegotiated private sector loans hides the true extent of the banks' asset quality problems. Whilst fundamental credit issues in the operating environment remain unresolved, some of these loans may re-emerge as non-performing loans," the report added.
Overall, Fitch said UAE banks remain profitable to date, despite weaker asset quality and slow loan growth.
But the rating agency added that it anticipates core earnings will decline given low business volumes and the recent Central Bank of the UAE rules on retail banking.
Customer deposits decreased significantly in the past three months with the outflow of unstable deposits (hot money) and some large government related deposits, Fitch said.
Positively, Fitch added that high levels of capital and healthy core earnings would provide banks with a solid cushion against a potential increase in non-performing loans.
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