Lending growth to pick up as ‘correction’ takes hold in UAE
The Dubai Expo and borrowing by the government and government related entities (GREs) will support lending growth that signifies the start of a robust recovery
The UAE banking sector will see lending growth to accelerate slightly in 2021 after a muted increase in 2020 as the economy undergoes a correction phase, S&P Global Ratings said in a report on Sunday.
The Dubai Expo and borrowing by the government and government related entities (GREs) will support lending growth that signifies the start of a robust recovery. The Central Bank of the UAE has forecast that the economy is likely to post 2.5 per cent growth this year after a contraction of 5.8 per cent in 2020. The apex bank expects to see a full economic recovery in 2022, with growth rising to a 3.5 per cent rate.
“Corporate borrowing is expected to improve only slightly as some deferred capital expenditure in 2020 might happen in 2021, along with refinancing of existing debt. We expect private sector leverage at nine per cent-10 per cent of nominal GDP over the next few years,” S&P analysts Puneet Tuli and Mohamed Damak said in a report on Sunday.
As the pandemic, lower oil prices, and continued pressure on the real estate sector increased risks for UAE banks in 2020, lending opportunities, at both the retail and corporate levels, remained muted, leading to one per cent loan book growth, compared with six per cent in 2019. The pandemic and contraction in many sectors forced companies to postpone capital expenditure. Shutdowns, job losses, and salary cuts in the private sector added to the poor demand for retail loans, S&P said.
However, being a wealthy economy with strong fiscal and external positions, the strength of the government’s net asset position had helped counteract the negative impact of lower oil prices on economic growth since late 2015, said the report.
Currently, the UAE economy is going through a correction phase. The pandemic has provided a renewed challenge to the economy and real estate market. “This is because the slowdown is happening when the real estate sector is under significant stress and other UAE sectors, such as hospitality, trade, and discretionary consumer goods, are experiencing a marked decline in revenue.”
The banking system's total exposure to the real estate and construction sectors stood at 28 per cent as of year-end 2020, assuming that one-third of personal loans for consumption purposes are channeled to real estate, the report noted.
“Residential real estate prices have declined more than 40 per cent since the peak in second-quarter 2014. We expect prices to remain under pressure in 2021, although the decline in prices will be slower, and we do not foresee a meaningful near-term recovery given the current supply-demand imbalance,” it said.
Another 20 per cent of the banking sector's total lending covered sectors such as trade, transport, storage, communication, and personal loans for business purposes at year-end 2020. A portion of these loans is at risk, which in addition to stress in real estate will lead to increased credit losses for UAE banks, the report noted.
S&P expects the real estate sector’s problem loans to increase further once current regulatory forbearance measures are lifted and banks start to account for the impact of the economic shock. However the process is expected to be gradual, minimising the overall impact. Those measures include the UAE Central Bank’s Targeted Economic Support Scheme that helped ease the pressure on corporate issuers and small and mid-size enterprises.
For most rated banks in the UAE, the top 20 corporate borrowers represent more than 25 per cent of their corporate lending exposure. “We believe that risks pertaining to weaker standards are higher for UAE's banking sector than peers in GCC, because UAE banks have higher exposure to real estate and construction sectors and other risky segments, such as struggling GRE's than GCC peers. In addition, UAE banks operate with relatively higher average loan-to-value than peers,” said the report.
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