The UAE's banking sector is set to underperform its regional peers over the next 18 months as concerns about a weak real estate market and Dubai's debt overhang will continue to weigh, Business Monitor International has said.
The sector will remain on its slow road to recovery heading into 2012 but concerns will constrain a more pronounced improvement in banks' balance sheets, analysts said in a new report.
They also noted that lending activity levels in the UAE were also well behind that in Saudi Arabia and Qatar.
And they said the fact that provisioning for non-performing loans hit a record high of AED47.1bn in May "should provide some concern".
BMI said that according to recently released data from the central bank in addition to Q1 financial statements from some of the country's largest lenders, "it is apparent that the United Arab Emirates' banking sector continues to trudge along on its slow road to recovery".
It added that the most noticeable development in the industry over the past three months has been the marked improvement in underlying liquidity conditions.
BMI said this had been driven in large measure by a fundamental reappraisal of risk sentiment that has solidified the economy's reputation as a "safe haven" in a volatile region.
It added that unrest in Bahrain had undermined its reputation as a stable banking hub in the Middle East, leading to a "pronounced shift in deposits into the UAE's banking sector".
Through April the total stock of deposits in the industry increased by 16.4 percent year-on-year, marking the fastest rate of expansion since September 2009, and a noticeable improvement upon the 6.8 percent rate of growth posted in December last year.
"Regardless of this slightly more sanguine outlook on the domestic operating environment however, banks remain relatively risk averse in our opinion, and have hitherto failed to begin ramping up lending," BMI's report said.
In the first four months of the year, the total stock of loans in the economy increased by only 3.2 percent year-on-year, analysts said, well below rates of credit growth seen in Saudi Arabia or Qatar.
"Our relatively bleak outlook on new loan growth over the coming 18 months underpins our view that activity in the private non-hydrocarbon sector will remain weak, regardless of the country's improved risk profile since the start of the year," BMI added.
"As the construction industry accounts for approximately 12 percent of the banking sector's loan books, our relatively downbeat outlook on the domestic real estate market not only bodes poorly for banks' ability to rapidly expand their balance sheets, but also raises significant risks about a deterioration in asset quality heading into 2012," analysts said.
Latest data from the central bank showed loans to the construction sector declining 2.7 percent year-on-year in April, marking the seventh consecutive month of contraction.
"With a host of major industrial and residential projects remaining on hold (if not cancelled all together), and the domestic real estate market unlikely to find a bottom until some point in 2012, the construction industry will remain a net drag on the banking sector heading into next year," the BMI report said.
Going forward, BMI said its core view was a continued recovery in the banking sector, albeit one which is "relatively slow and uninspiring".
Analysts said the biggest cloud which continues to lurk on the horizon stems from Dubai's debt overhang.
"Until a clearer picture surrounding the extent of domestic banks' exposure to ongoing debt restructurings by major government related entities (GREs) emerges, it will be difficult to alter our fundamental outlook on the sector," BMI said.
"Given the risk of further high-profile debt restructurings coming to the surface over the coming 18 months, we maintain our view that the UAE's banking sector will underperform its regional peers in Saudi Arabia and Qatar in 2012," BMI added.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.
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