By Andy Sambidge
Rating agency says it views rate cut 'positively' as loans growth plummets.
Moody's on Monday applauded moves by the UAE to stimulate bank lending as latest figures showed a big drop in loans in the first half of 2009.
The Central Bank of the UAE (CBUAE) on September 1 announced that it was lowering the interest rate on the liquidity support facilities extended to banks.
The measures were aimed at restarting bank lending in the UAE where banks, particularly in Dubai, have been reluctant to lend despite supportive measures taken by the CBUAE.
In a research note published on Monday, Moody's said it viewed these measures positively, adding that it believed they would provide "greater incentive to banks to extend lending to creditworthy borrowers".
According to the latest banking indicators published by CBUAE, aggregate growth in net loans for the first seven months of 2009 was just 1.3 percent.
This compared to an average compound annual growth rate of 37 percent for the last five years.
However, the ratings agency added that it will monitor the banks' new lending quality as well as possible weakening in capitalisation ratios.
"In Moody's view, capitalisation levels of UAE banks currently stand at adequate levels, and are higher than globally acceptable minimum requirements," John Tofarides, Moody's analyst in Dubai added.
"Going forward, Moody's would like to see capitalisation levels at the UAE banks remaining strong and higher than in other rapidly-developing markets due to both high industry correlation and borrower concentration."
The rating agency cautioned that any material weakening in capitalisation levels "might prompt rating reviews".
"Banks have significantly tightened credit standards and been mainly focused on servicing their existing clients," added Tofarides.
"Although part of the tumbling in loan growth was due to the higher credit risk aversion, especially in 2009 following the severe property market collapse in the first two months of the year, much of it was also driven by tight liquidity as market funding remained disrupted and customer deposit levels had to be supported by sizeable injections of government funds," Tofarides said.