UAE banks to weather difficult 2015

16 February 2015

New report says sector is well-equipped to deal with slowdown

  • Equity market volatility and residential real estate correction expected
  • Higher credit losses anticipated in banking
  • Banks expected to be more conservative in lending
  • But banking sector well-positioned to weather problems

Market conditions for the UAE’s banking sector are set to get tougher in 2015, says a new report from rating agency Standard & Poor’s released on 16 February.

The agency says that after a strong 2014 with favourable operating conditions, the current year is likely to see a deceleration in credit and deposit growth as the low oil prices start to affect the banking sector.

Continued volatility on the UAE’s equity markets is also anticipated, as is a correction in the residential real estate market, both of which are events that are likely to dent confidence about the UAE’s growth prospects.

The report also anticipates that the banking sector’s credit losses this year could be relatively higher than last year, a development that could limit banks’ earnings growth to mid-single digits in 2015 and into 2016.

Due to the potentially worsening market conditions, banks are forecast to take a more conservative approach and rein in lending. Credit growth is likely to decline to 7-8 per cent, S&P says.

Yet, the rating agency says that the banking sector is far better positioned to weather this more difficult operating environment than it was back in 2009 when the global financial crisis hit the UAE.

The banks have improved their funding, asset quality and capitalisation levels in recent years.

Financial results for 2014 were also positive for UAE banks, with most posting healthy increases in profit and revenue having benefited from the country’s strong economic growth.

The growth story is a continuation of the positive upward trends seen in 2013 and 2012. Against this backdrop, banks were able to achieve large recoveries on their non-performing exposures which has ensured their asset quality also improved.

S&P also anticipates that although the real estate market is likely to correct itself from the rapid growth seen in the past couple of years, the correction will have less effect on the banks than compared to the collapse of the property market in 2009.

The agency anticipates that the price declines in real estate will not be too big and that the UAE developers are operating with much stronger balance sheets in relation to their financial position than compared to 2009.

Stronger regulation also provides a level of protection for the sector, with developers required to secure equity funding before launching any project rather than just relying on debt.

Many developers are funding their projects with a large amount of money being generated through advanced sales rather than short-term bank loans.

Caps on mortgage lending are also limiting households getting into too much debt and risking defaulting on payments.

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