Moody's Investors Service has kept its outlook on the United Arab Emirates banking system at stable, reflecting a gradually recovering economy, as well as banks' strong capital, resilient profitability and solid funding.
The report, "Banking System Outlook - United Arab Emirates; Recovering economy and resilient financial fundamentals drive stable outlook," said a combination of rising oil production, government infrastructure spending in Dubai, as well as Abu Dhabi's fiscal stimulus package will bolster economic growth. Moody's forecasts GDP growth of 2.2% in 2018 and 2.9% in 2019, following a slowdown to 0.8% in 2017. The recovering economy will stimulate credit growth.
"Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers," said Mik Kabeya, Assistant Vice President at Moody's.
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Strong capital levels provide a large, loss-absorbing buffer for the UAE's banks. Moody's expects strengthening profitability to support capital levels, with sector-wide tangible common equity (TCE) at 14%-15% of risk-weighted assets over the next 12 to 18 months.
Profitability will improve slightly as rising interest rates support net interest margins. As banks raise their lending rates, their higher loan yields will moderately outweigh the higher rates they will need to pay on deposits. In addition operating expenses will remain broadly stable, and loan-loss provisioning will gradually stabilise as the economy recovers.
Higher oil prices will continue to support solid funding and liquidity. "UAE banks will remain primarily deposit-funded, with only a moderate need to turn to confidence-sensitive capital markets" said Mik Kabeya. UAE banks have sufficient liquidity headroom to accommodate a pick-up in credit growth.
The UAE government's willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months.
