On the back of economic resilience, the UAE banking system will see robust credit growth underpinned by strong capitalisation, stable funding and liquidity conditions, Moody's Investors Service.
Maintaining its outlook for the banking system at stable, the global ratings agency said economic growth of the UAE will rebound.
"We expect improving non-oil economic activity to increase real GDP growth to 3.2 per cent in 2018, following a forecast slowdown to 1.1 per cent in 2017 from 3 per cent in 2016," said Mik Kabeya, analyst at Moody's.
"Faster economic growth in 2018 will support the banking system's credit growth, and we forecast credit growth of around five per cent in 2018, after a forecast lower growth of around two per cent in 2017, from 5.8 per cent in 2016 and 8.0 per cent in 2015" said Kabeya in the report 'Banking system outlook - UAE: Economic resilience and solid bank financial fundamentals drive our stable outlook'.
Loan performance will soften modestly following sluggish economic growth this year. Problem loans will edge higher, reaching 5.5-6.0 per cent of gross loans by 2018, from 5.3 per cent in June 2017.
"High concentrations of loans to government-related institutions and to a volatile real-estate sector pose downside risks to loan quality," Kabeya said.
Banks' capital levels will remain strong over the next 12 to 18 months, with system-wide tangible common equity at between 14 per cent and 16 per cent of risk-weighted assets.
"This resilience, which reflects banks' internal capital generation and lower growth in risk-weighted assets, provides a substantial cushion against softening loan performance," the ratings agency said.
"Stabilising oil prices and international bond issuances will continue to support funding and liquidity conditions in the country, following a tightening during 2016 amid oil price weakness" said Kabeya. UAE banks will remain primarily deposit-funded, with a fair recourse to more volatile market funding.
According to the UAE Central Bank's Credit Sentiment Survey, corporates and small businesses are expected to be the primary driver of credit demand over the next 12 months, continuing a trend seen in the previous quarter when business lending outpaced lending to individuals.
Abdul Aziz Al Ghurair, chairman of UAE Banks Federation, has said UAE banks would post profit growth of around five per cent in the second half of 2017, similar to the first six months as bad loans ease and lenders weather the Qatar crisis.
"The whole economy, the government and the banking industry has accepted the oil price will be around $50, so they have to live with that and is part of their planning process," Al Ghurair was quoted as saying in an interview.
Moody's expects profitability to remain strong, with a net income measuring around 1.5 -1.7 per cent of tangible banking assets over the next 12 to 18 months.
Badis Shubailat, associate analyst at Moody's, said the recovery would reflect government spending in Dubai and increasing activity in trade and financial services.
"Non-oil activity, including government spending in Dubai and robust economic activity in trade and financial services, will support growth in the UAE economy. The construction of major infrastructure projects in Dubai in preparation for the 2020 World Expo will also contribute to growth," said Shubailat.
Non-oil GDP cooled during 2016, largely reflecting constrained public-sector spending. Government spending accounted for 30 per cent of GDP in 2016, and services accounted for 78 per cent of nominal GDP, Moody's noted.