Slowing economy to weaken UAE banks’ profitability
Lending growth would remain muted, as most banks will focus on managing the impact of the operating environment on their asset-quality
Higher cost of risk and lower margins will reduce profitability of banks in the UAE for 2020-2021, but most of them are expected to remain profitable, global ratings agency said.
“We believe UAE banks' reduced profitability will last longer due to the high proportion of non-interest-bearing deposits in their funding structures and lower revenue on the asset side,” said S&P primary credit analyst Puneet Tuli.
“Margins have tightened by 30-40 basis points (bps) due to lower interest rates. Lower margins and higher ,” said Tuli.
Across the world, 2020 has been hard for banks but next year may be even tougher, cautions S&P Global Ratings in a report series published on Tuesday.
"Support measures that have steadied banks and helped borrowers survive cannot last forever," said S&P Global Ratings credit analyst Gavin Gunning.
In the UAE, like elsewhere, operating conditions are weighing on banks’ performance. “We expect asset quality and profitability to deteriorate in 2020-2021 as the economy experiences a sharp recession. We expect GDP to contract by approximately 8.5 per cent in 2020 and recover only modestly next year,” said Tuli.
He said lending growth would remain muted, as most banks will focus on managing the impact of the operating environment on their asset-quality as regulators lift their forbearance measures. “Relaxation of certain prudential requirements carries risks for the banking sector. To counter the impact of the pandemic, the Central Bank of UAE relaxed certain prudential requirements, which risks eroding banks' strong capital buffers.”
The ratings agency said the fall in oil prices and economic slowdown will prompt a rise in problem loans and the cost of risk, at a time when the real estate sector was already under significant stress.
Other sectors, such as hospitality and discretionary consumer goods, are also experiencing a significant decline in revenue, which weighs on their credit quality. “Because of ongoing regulatory forbearance measures, we anticipate that nonperforming loans will reach a peak in 2021.”
The fraud case in one large corporate and the recent liquidation of a major construction company, combined with banks' strategies to start building additional provisions, will push credit losses to 180 bps-200 bps in 2020-202, S&P said.
Measures implemented by Central Bank of UAE (CBUAE) include requiring that banks not classify exposures as nonperforming if they suffered from cash flow pressures related to the pandemic; asking banks to defer repayments on their loans to struggling companies and retail clients; and providing banks with liquidity. The CBUAE has also raised the limit on banks' exposure to the real estate sector and increased the loan-to-value limits for first-time homebuyers. Finally, the CBUAE halved banks' required deposit reserve requirements and reduced regulatory capital conservation buffers, S&P report said.
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