Does UAE’s banking sector deserve to be given credit or not?
The below is an excerpt from a 2017 BMI research: a Fitch group company
The UAE’s banking sector will see growth strengthen in 2018, and remain fairly robust in 2019, as the economy at large benefits from higher oil prices and easing oil production curbs.
Total assets growth and client loans growth both decelerated in June and July, but we believe this is primarily a product of the more sluggish economic activity associated with the month of Ramadan – which ran from May 26 to June 24 this year – and the summer months in general in the UAE, rather than a downturn in confidence.
We maintain that pent-up demand and an improving economy will see growth strengthen through the second half of the year, and we forecast total asset growth of 5.2 per cent and client loans growth of 5.5 per cent
While we have downgraded our real GDP growth outlook for the UAE since the start of the year, this is primarily a result of oil production curbs made as part of an OPEC/non-OPEC agreement aimed at drawing down global stockpiles and boosting prices.
Growth will be slower than we previously anticipated, but the non-oil economy continues to grow, and the economy at large will improve next year as oil prices rise, and this will drive demand for credit.
We expect that the primary driver of credit demand over the next 12 months will be corporates and small businesses, continuing the trend seen in the previous quarter, when business lending outpaced lending to individuals.
We see no risk to banking sector stability, given that nonperforming loans stand at only around 6.0 per cent, and banks remain well capitalised.
Client deposits will perform more strongly than credit demand in 2017 and through 2018 and 2019, benefitting from interest rate hikes in the UAE which will induce more saving.
In July, deposits expanded by 7.1 per cent y-o-y, and we forecast a year-end expansion rate of 8 per cent this year, and 7.2 per cent in 2018.
The UAE Central bank tends to track the US Federal funds rate in order to maintain its currency peg to the US dollar, and so has enacted three policy rate hikes over the past 12 months. Economic growth in the US will prompt a 50 basis points hike in both 2018 and 2019, and we forecast that the Central Bank will follow suit in order to maintain the current interest rate differential
Qatar risks limited
We believe that the fallout of the diplomatic spat on the UAE’s banking sector will be limited, although acknowledge some risk that if the impasse continues for far longer than the relatively rapid resolution we currently expect.
In addition to closing borders and airspace, Gulf Arab commercial banks, including those of the UAE have begun holding off on business with Qatari counterparts. The Saudi Arabian Monetary Authority reportedly advised banks in the region not to deal with Qatari banks in Qatari riyals, and bankers in the UAE have postponed deals until they receive guidance from the Central Bank of the UAE.
UAE banks’ exposure to Qatar is small at less than 5 per cent, and we do not expect that there will be a significant impact on them from the current spat.
The credit quality of Emirati banks continues to improve but non-performing loan rates are still high by regional standards. Non-performing loans (NPLs) equal 6.3 per cent of total loans as of Q316, having fallen from 11 per cent in 2011. There is also significant divergence across banks with some having strong exposure to sectors more vulnerable to the slump in energy prices, such as real estate and construction contractors, which account for almost 30 per cent of all loans
Most Emirati banks are well capitalised with the overall capital adequacy ratio standing at 18.3 per cent in the second quarter of 2016, above the regulatory requirement of 12.5 per cent. Adoption of the Basel III standards (which commenced at the start of 2016 and will be completed by the end of 2018) should progress smoothly as most Emirati banks are at or near desired levels for capital adequacy.