• Strong operating environment to support UAE banking sector

      December 4, 2017    

    Dubai: The UAE’s banking sector outlook for 2018 remains solid in the context of the stable operating environment in the country, according to Fitch Ratings.

    “The UAE operating environment remained solid in 2017, and this is expected to continue in 2018, due to its greater diversification [particularly Dubai] than GCC peers,” said Redmond Ramsdale, an analyst with Fitch Ratings.

    The UAE’s GDP growth continues to be led by the non-oil sectors. There have been some project delays or cancellations due to the lower oil prices, mainly putting pressure on Abu Dhabi banks, but Fitch believes this to be manageable. The UAE’s real GDP growth is likely to be 3.4 percent in 2018, up from 1.3 percent in 2017.

    The economy’s continued robustness has resulted in overall stable asset-quality metrics for banks in 2017. Deterioration in SME [small and medium enterprises] portfolios has been offset by some further recovery in historic corporate impaired loans.

    “Loan impairment charges increased in 2015 and 2016 as a result of the SME issues but started to reduce in the first half of 2017. This should improve further for 2017 and 2018. Nevertheless, we believe asset-quality metrics are generally at their optimum range,” said Ramsdale.

    Loan-loss reserve coverage has been increasing in all banks over the past three years and is now stable. It should be sufficient for IFRS 9 requirements. A greater decrease in real-estate prices and unsuccessful repayment/refinancing of Dubai’s restructured debt could lead to re-emergence of asset-quality problems in the UAE.

    Growth is still strong across the Islamic banks as there has been some migration to Sharia-compliant banking facilities now that products are broadly equivalent, and banks’ ability to structure new Sharia-compliant products has increased.

    Lower oil price

    Leading UAE banks have reported robust improvement in performance with overall profitability and return on equity (RoE) higher in the third quarter of 2017, according to an analysis of key performance metrics by global professional services firm Alvarez & Marsal (A&M).

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    Strong funding and liquidity

    Analysts expect capital levels to remain unchanged in 2018, due to lower loan growth. All banks operate on the standardized approach in accordance with Basel II. The central bank has not approved a move to the internal ratings-based approach for any bank, even though most now have developed the systems for this, and this is unlikely to change in the short term.

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