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Sat 17 Nov 2012 10:26 AM

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Moody's cautious on UAE banking prospects

Rating agency says outlook negative; Dubai banks facing asset quality challenges

Moody's cautious on UAE banking prospects
(AFP/Getty Images - for illustrative purposes only)

The outlook for the banking system of the UAE remains negative with Dubai-based banks in particular facing asset quality challenges, said Moody's in a new report.

The rating agency said another key driver of the outlook would be low provisioning coverage levels while the performance gap between Dubai and Abu Dhabi banks was likely to grow.

Moody's said it expects problem loan levels to remain elevated, driven by exposures to large, stressed, government-related issuers (GRIs) and legacy corporate impairments, primarily real-estate-related, which are still emerging after failed attempts to restructure earlier in the crisis.

The report said that the negative outlook also captures specific structural weaknesses that will continue to undermine system-wide bank performance over the 12-18 month outlook period.

Moody's said issues such as limited transparency, sizeable related-party exposures and high loan and deposit concentrations will continue to leave UAE banks "vulnerable to name-specific credit risks in the near term despite recent guidelines published by the Central Bank of the UAE".

The agency added that over the outlook period, the diverging performance in the banking system between the two core cities will continue to grow.

"Abu Dhabi benefits from higher public-sector spending, while Dubai's prospects will remain overshadowed by real-estate oversupply and the legacy GRI asset-quality challenges, despite its more diversified private sector, which has shown solid signs of recovery," it said.

Moody's also said the UAE's dependence on oil, as well as core sectors of trade, services, global logistics and tourism, continue to make the local economy sensitive to macro risks of weakened growth, global recession and low oil prices.

Accordingly, a sustained drop in oil prices would reduce public spending and have a marked effect on overall economic confidence, it added.

Despite Moody's projections of modest overall credit growth of 4-7 percent for 2012 and 2013 real GDP growth in the 2-3 percent range for 2012 and 2013, it said asset quality will remain poor with the ratio of problem loans to gross loans in the 10-12 percent range for 2012, and then declining marginally in 2013.

"Moody's view is mainly driven by the persistently high level of exposures to large stressed GRIs and other legacy exposures, despite the recovery in core sectors, which, with commercial real estate, continue to contribute the bulk of the problem loans," its report said.

Moody's said it expects associated provisioning needs and low lending confidence to continue to subdue bank profitability.

"These trends will continue to suppress banks' net profits for 2012 and into 2013, with the ratio of net income to average risk-weighted assets at around 2 percent," the report said.

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