Banks stable on resilient profitability, solid funding

Dubai - SMEs will benefit through increased loan availability

Underpinned by a steadily recovering economy, strong capital base, resilient profitability and solid funding, the outlook for the UAE banking system remains stable, according to a global ratings agency.
While a recovering economy continues to stimulate credit growth, SMEs will benefit through increased loan availability with higher oil prices continuing to support solid funding and liquidity, Moody's said in its Banking System Outlook report. 
"A combination of rising oil production, government infrastructure spending in Dubai, as well as Abu Dhabi's fiscal stimulus package will bolster economic growth," said the report.
In 2018, Moody's forecasts GDP growth of 2.2 per cent and 2.9 per cent in 2019, following a slowdown to 0.8 per cent in 2017. 
"Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers," said Mik Kabeya, Assistant Vice President at Moody's.  Strong capital levels provide a large, loss-absorbing buffer for the UAE's banks. Moody's expects strengthening profitability to support capital levels, with sector-wide tangible common equity (TCE) at 14 per cent-15 per cent of risk-weighted assets over the next 12 to 18 months. The report said profitability would improve slightly as rising interest rates support net interest margins.  "As banks raise their lending rates, their higher loan yields will moderately outweigh the higher rates they will need to pay on deposits. In addition operating expenses will remain broadly stable, and loan-loss provisioning will gradually stabilise as the economy recovers."
Kabeya said the UAE banks would remain primarily deposit-funded, with only a moderate need to turn to confidence-sensitive capital markets. "The UAE banks have sufficient liquidity headroom to accommodate a pick-up in credit growth."
The UAE government's willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months, said the report.
The UAE's top 4 lenders First Abu Dhabi Bank (FAB), Emirates NBD as well as Abu Dhabi Commercial Bank (ADCB) and Dubai Islamic Bank (DIB) posted a 21 per cent increase combined net profit of Dh8 billion ($2.2 billion) in second quarter 2018.
In an earlier report, Moody's said it expects profitability for the UAE's largest lenders to remain stable into 2019, driven by higher net interest income and lower provisions.
"We expect core profitability for the large UAE banks to remain broadly stable over the next 12 to 18 months, as interest earnings hold steady at current levels, and as the decline in provisioning charges reverses due to softening business confidence," said Nitish Bhojnagarwala, Moodys' vice-president Senior Credit Officer.
A forecast made by a ratings agency S&P said banks in the GCC would continue to breathe a little easier in the year ahead on the back of strong lending growth and stable profitability, barring any unexpected geopolitical or oil-price shock.
Lending growth of GCC banks would stabilise at around the five per cent mark over the next 12 months, "as higher oil prices and stronger public investments raise economic growth in the region overall," S&P said.  
Supported by strategic government initiatives, the lending growth will be driven by higher government spending, it said.
In the first half, the UAE banking sector continued to surpass GCC peers in terms of total assets that had surged 2 per cent to Dh2.7 trillion. According to the Central Bank of the UAE, the country's banking sector remained well capitalised, with solid liquidity buffers, stable funding and improved profitability. Moody's analysts expect the UAE's banking sector to remain largely resilient to oil price volatility and its impact on government finances and economic growth. - issacjohn@khaleejtimes.com