Published: 15:34 December 3, 2017
Dubai: The UAE’s banking sector outlook for 2018 remain solid in the context of stable operating environment in the country, according 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 per cent in 2018, up from 1.3 per cent 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.
Ultimately, the success of the various plans to restructure these loans will depend on developments in the UAE economy and realisation of the underlying collateral. We expect bank loan growth to average 5 per cent for 2017, down from 7 per cent in 2016.
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).
Almost all of the metrics applied by A&M in their analysis have risen quarter on quarter, suggesting that banks have successfully adapted to the market conditions created by a lower oil price environment, growing their loan books and are continuing to manage their costs sensibly.
The UAE Banking Pulse report analysed quarterly data of the 10 largest listed UAE banks in the third quarter of 2017 against the second quarter of 2017, and identifies prevailing trends throughout the intervening period.
: The housekeeping measures which we saw many banks implement last year were on the back of fears that the operating environment would worsen significantly, but it has not turned out to be as bad as was expected,” said Dr Saeeda Jaffar, a managing director of A&M.
Rating agency Fitch expects loan growth to remain in mid-single digits in 2018. UAE banks remain profitable. Cost of funding improved in 2017 with an improvement in liquidity conditions and this is expected to continue. Pre-impairment operating profits are able to absorb high loan impairment charges.
“We do not expect significant deterioration in profitability metrics for 2017 and in 2018 despite lower GDP growth and overall increased funding costs, as banks have been successful in repricing their books. Interest rate rises should also continue to benefit as banks maintain high levels of non-remunerated deposits,” said Andrew Parkinson, an analyst at Fitch.
Core Capital ratios were a strong average of 14 per cent at end of first half 2017. Strong internal capital generation capacity and solid liquidity buffers provide a solid cushion against asset-quality deterioration. Some banks have accessed the international debt capital markets, raising not just senior debt but also subordinated and hybrid Tier 1 capital.
Strong funding and liquidity
Analysts expect capital levels to remain unchanged in 2018, due to lower loan growth. All banks operate on the standardised 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.
Analyst say funding and liquidity is strong across UAE banks. Deposits have proved behaviourally stable, although contractually short-term. Liquidity pressures have improved, with Abu Dhabi sovereign issuance and subsequent capital injection into the Abu Dhabi banks, but slower deposit growth and higher, albeit improved, pricing is likely to remain. Customer deposits form the bulk of funding requirements.
The average loans/deposits ratio is healthy, at about 95 per cent at end of first half 2017, decreasing from 98 per cent at end-2016 due to lower loan growth. This ratio is expected to reduce slightly further for in 2017 and 2018 but remain above 90 per cent. Most banks have a large stock of liquid assets, which provides a good liquidity buffer.