Strong caps, earnings to help UAE banks versus risks

The Covid-19 pandemic, lower oil prices and continued pressure on the real estate sector have increased risks for UAE banks but banking authorities’ response to the crisis reporting requirements have reinforced oversight and transparency, S&P Global Ratings said.

The agency expects rated UAE banks’ asset quality indicators to deteriorate further once regulatory forbearance measures are lifted, although some will be protected by their strong capitalisation and earning capacity.

“Although forbearance measures could be extended from their current mid-year 2021 expiry date, we expect their removal to be gradual and managed. Despite this support, banks with a structural orientation to sectors where prospects remain weakest are expected to book further significant credit losses,” S&P said.

While the message overall points to a higher risk for the banking sector, the positive news is that four of the five banks S&P rate in the UAE — First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Sharjah Islamic Bank and Mashreqbank — are now on stable outlooks, previously negative. The impact was on National Bank of Fujairah, which was downgraded to BBB from BBB+, but now also has a stable outlook.

S&P revised down its assessment of economic risk for the UAE’s banking sector to ‘six’ from ‘five’ and revised its economic and industry risk assessment trends to stable from negative.

It noted that the sharp economic contraction in 2020 — and prospects of a protracted recovery in 2021 and beyond — will have varying effects on rated UAE banks.

“We expect the residential real estate sector will remain under pressure for at least another year or two because of continuous oversupply, while demand-driven weaknesses will hamper the tourism, hospitality, and aviation sectors, as well as some trading sectors. We therefore expect UAE banks’ asset-quality indicators will continue to deteriorate in the next 12-24 months, as regulatory forbearance measures are gradually lifted, and that credit losses will likely remain elevated,” it said.

The report noted that UAE banks’ exposure to the real estate sector, relatively high after average loan-to-value ratios limits were increased by the Central Bank of the UAE and significant exposure to other risky sectors, such as struggling government-related entities, have contributed to its decision.

“Our estimates of risk-adjusted capitalisation among rated UAE banks have weakened commensurately but generally remain strong. We also expect banks will remain profitable with an average return on assets of one per cent in 2021, despite the sharp increase in cost of risk and lower interest rates.”

The report said when the pandemic started, the central bank acted swiftly and extended a Targeted Economic Support Scheme to banks. This included, among other measures, a Dh50 billion zero-cost funding facility and the requirement to defer some corporate exposures to preserve these companies’ productive capacity during stressed market conditions.

— issacjohn@khaleejtimes.com