Liquidity buffers seen to protect UAE banks

Dubai - The ratings agency expects real GDP growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017

Resilient capital and liquidity buffers will help protect UAE banks' credit profiles despite the continued economic slowdown, Moody's Investors Service said.
The ratings agency expects the country's banking system to remain stable as the government's support for UAE banks to likely remain high, "reflecting the government's continued willingness and its strong capacity to provide financial support if the need arises, despite fiscal pressure from falling oil revenues."
"The solid profitability and capital of the UAE banks will provide protection against rising problem loans," said Nitish Bhojnagarwala, assistant vice-president - and analyst at Moody's, said in a report on UAE banking system.
"At the same time, sufficient liquidity will cushion against reduced flows of government deposits as lower oil prices impact government revenues," he said
The ratings agency expects real GDP growth of around 2.5 per cent and 1.9 per cent for 2016 and 2017, down from 3.2 per cent in 2015.
"This economic slowdown will lead to modest increases in new problem loan formation, particularly in the overleveraged small and mid-sized company (SME) and retail (loans to individuals) segments."
"We expect problem loans to increase modestly to around 5.5 per cent of total loans by mid-2017 following a period of strong recovery, which drove delinquencies down from the 2011 peak of 10.6 per cent to around five per cent currently," said Bhojnagarwala.
However, according to the UAE Central Bank's latest quarterly sentiment survey, demand for business and personal loans in the country softened in the third quarter of 2016 reflecting tightening credit conditions. Results from the September quarter survey revealed a downward trend in overall credit appetite for both business and personal loans. The survey suggests reduced willingness by UAE banks to lend while economic growth and activity remains slow, the survey said, adding that this was evident in survey respondents reporting tightening credit standards pertaining to terms and conditions.
The survey showed banks' credit standards tightened further during the September quarter, with the effect particularly pronounced for smaller firms, and this tightening is expected to continue more slowly in the current quarter, the central bank said.
However, Moody's said profitability would remain strong on the back of a broadly stable return on assets at around 1.7 per cent over the outlook horizon.
Although funding costs and provisioning costs will likely increase, the rating agency expects them to be offset by rising corporate yields combined with loan growth (subdued at 3-5 per cent) and modest efficiency gains.
"Additionally, capital buffers are likely to improve and Moody's expects tangible common equity to increase modestly to around 15 per cent of risk weighted assets by 2017, up from 14.3 per cent as of December 2015. In addition, loan-loss reserves were a solid 94 per cent of problem loans as of June 2016, the rating agency expects this level of coverage to continue," said the report.
"The reliance on market funding for UAE banks' is expected to increase as deposit growth continues to decelerate," added Bhojnagarwala.
"However, the liquidity buffers remain strong, despite a modest decline, with liquid assets expected to remain around 25 per cent of total assets".
- issacjohn@khaleejtimes.com