Creditworthiness of UAE banks solid, says S&P

PARIS - The creditworthiness of the banking system in the UAE reflects its solid financial profile and improved banking regulation, said Standard & Poor’s Ratings Services in a report published yesterday.

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Published: Tue 28 Dec 2004, 12:02 PM

Last updated: Thu 2 Apr 2015, 11:49 AM

These positive factors are partially offset by credit risk concentrations, fast growth in consumer lending, fiercer price competition, and a weak track record regarding asset quality.

”The five largest banks, which make up about one-half of the system, are highly profitable, due to high interest margins, increasing business volume, and low operating costs,” said Standard & Poor’s credit analyst Anouar Hassoune, lead author of the report. “They generally have strong financial profiles characterised by a high level of retail deposits, good liquidity, and high capitalisation.”

The market remains crowded, with a further 41 banks competing for business, explains the report. The 21 locally incorporated and 25 foreign banks of the UAE banking system make it the second-largest in the Gulf after Saudi Arabia, with total assets of Dh367 billion ($100 billion) at Dec. 31, 2003.

”The next trend could be consolidation within the system due to increased competitive pressures,” said Standard & Poor’s credit analyst Emmanuel Volland. “To survive, some of the smallest banks will also try to specialize or adopt a niche strategy, such as converting into Islamic financial institutions.”

In years past, the UAE banks have operated in a rather easy banking market, driven by high per capita wealth and strong economic performance. The landscape is changing, however, due to increasing competition and the entrance of foreign banks into the market.

Moreover, as stock markets grow rapidly, disintermediation could increase, reducing the key role that the banking system currently plays.

As a result of the recurrence of large defaults over the past four years (including the recent default of a major UAE contractor), Dubai’s Department of Economic Development recently announced the creation of a formal private sector-led credit bureau, independent from the central bank.

Standard & Poor’s considers this initiative to be a key step in limiting systemic risks. Given the relative weaknesses in the underwriting culture of the banking system, Standard & Poor’s views with caution the absolute credit expansion over the past decade.

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