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Sat 12 Dec 2015 01:01 AM

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UAE banks expected to remain resilient in 2016 despite cheap oil

Moody's maintains stable outlook for sector, reflecting its expectation of robust capital and liquidity buffers

UAE banks expected to remain resilient in 2016 despite cheap oil

Credit profiles of UAE-based banks are forecast to remain resilient despite an economic slowdown in the country driven by low oil prices although credit growth will be subdued, according to Moody's Investors Service.

The agency has maintained its stable outlook on the UAE's banking system, reflecting its expectation of resilient capital and liquidity buffers over the next 12 to 18 months.

"We expect UAE banks' credit profiles to broadly remain resilient despite the economic slowdown driven by low oil prices, owing to their strong capital and liquidity buffers coupled with resilient profitability," said Nitish Bhojnagarwala, assistant vice president at Moody's.

Moody's also said it expects UAE authorities to remain highly supportive of local banks over the outlook period, reflecting its capacity to provide financial support, despite fiscal pressure from falling oil revenues.

However, the softening economy will weaken operating conditions and result in subdued credit growth. The rating agency said it expects credit growth to slow down to 3-5 percent annually for 2015 and 2016 from around 9 percent for 2014.

Moody's said it expects asset quality to remain stable, with impairments at around 5 percent of total loans for 2016.

"While pressures in the small and mid-sized enterprise sector will increase, the UAE banks' continued resolution of legacy problem loans will moderate the new problem loan formation," said Bhojnagarwala.

Moody's added that it expects banks' return on assets to remain at around 2 percent over the outlook period while profitability will remain stable, supported by solid margins, stable operating costs and provisioning charges.

The ratings agency also said that capital buffers are solid and expects them to improve further, with tangible common equity expected to reach around 15 percent of risk-weighted assets by 2016, up from 13.8 percent as of June.

In line with tightening liquidity across the GCC region as a result of lower oil prices, liquidity metrics for UAE banks will decline for the first time since the 2008 crisis. Liquid assets are expected to decline to a still solid 25 percent from a peak of around 30 percent of total assets as of December 2014 over the outlook period.

"Deposit growth will decelerate sharply to 2-4 percent this year and into 2016 from 10 percent for 2014. This is driving the banks to raise funding from increasingly expensive and confidence-sensitive debt and sukuk markets to support growth," added Khalid Howladar, senior credit officer at Moody's. "As such we expect market funding levels and loan-to-deposit ratio to continue increasing throughout 2016."

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