DUBAI: Moody’s Investors Service has maintained its stable outlook on the United Arab Emirates’ banking system, reflecting the rating agency’s expectation of resilient capital and liquidity buffers.
The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in the system over the next 12 to 18 months.
Moody’s report, entitled “Resilient Capital and Liquidity Buffers Drive Our Stable Outlook” is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report is an update to the markets and does not constitute a rating action.
“We expect UAE banks’ credit profiles to broadly remain resilient despite the economic slowdown driven by low oil prices, owing to their strong capital and liquidity buffers coupled with resilient profitability,” says Nitish Bhojnagarwala, an Assistant Vice President at Moody’s.
However, the softening economy will weaken operating conditions and result in subdued credit growth. The rating agency expects credit growth to slow down to 3%-5% annually for 2015 and 2016 from around 9% for 2014.
Nevertheless, Moody’s expects asset quality to remain stable, with impairments at around 5% of total loans for 2016. “While pressures in the small and mid-sized enterprise sector will increase, the UAE banks’ continued resolution of legacy problem loans will moderate the new problem loan formation” explains Mr. Bhojnagarwala.
Moody’s expects banks’ return on assets to remain at around 2% over the outlook period. Profitability will remain stable, supported by solid margins, stable operating costs and provisioning charges. Although funding costs are increasing, we expect that it will largely be offset by rising corporate yields, as US linked interest rates increase and the highly competitive lending pressures continues to ease into 2016.
The rating agency also notes that capital buffers are solid and expects them to improve further, with tangible
common equity expected to reach around 15% of risk-weighted assets by 2016, up from 13.8% as of June 2015. In line with tightening liquidity across the GCC region as a result of lower oil prices, liquidity metrics for UAE banks will decline for the first time since the 2008 crisis. Liquid assets are expected to decline to a still solid 25% from a peak of around 30% of total assets as of December 2014 over the outlook period.
”Deposit growth will decelerate sharply to 2%-4% this year and into 2016 from 10% for 2014. This is driving the banks to raise funding from increasingly expensive and confidence-sensitive debt and sukuk markets to support growth” says Khalid Howladar, Senior Credit Officer at Moody’s. “As such we expect market funding levels and loan-to-deposit ratio to continue increasing throughout 2016,” he adds.
Finally, Moody’s expects the UAE authorities to remain highly supportive of local banks over the outlook period, reflecting the government’s continued willingness and its strong capacity to provide financial support, despite fiscal pressure, from falling oil revenues.
The preceding was a press release from Moody’s and does not necessarily reflect the editorial policy of The Cairo Post.