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'DECLINE IN DEBT PROBLEMS'

Moody's gives stable rating for UAE's banking system

Dubai, November 13, 2013

Moody's Investors Service said that outlook for the UAE's banking system has been changed to stable from negative.

The outlook change reflected the continued improvements in the operating environment and the ongoing recovery of the local real-estate market, said the report entitled ‘Banking System Outlook: United Arab Emirates.’

It expects the recovery to lead to a decline in problem loan levels and an increase in profitability over the next 12 to 18 months.

The rating agency also expects that banks will continue to maintain high liquidity and capital buffers that were built up since the onset of the global financial crisis.

The real GDP is expected to grow by 3.6 per cent this year and 3.7 per cent in 2014, supported by continued public sector spending, particularly in Abu Dhabi; and strong signs of recovery in Dubai's more diversified private sector, it said.

This economic growth, combined with increasing confidence and the ongoing real estate market recovery, will support credit growth of 7 to 10 per cent in 2014, said the report.

The environment will support further declines in the problem loans to gross loans ratio to 8 to 9 per cent over the outlook period, from a 10.5 per cent system average at year-end 2012 (9.5 per cent as of June 2013).

Asset-quality metrics will also be supported by a reduction in the stock of problem loans due to the increasing volume of settlements, recoveries and commercial restructurings and expected loan growth, said the Moody’s report.
 
The improvement in asset quality will drive lower loan-loss provisions, which, when coupled with modest asset growth, will support an increase of UAE banks' net income to around 2.5 per cent of risk weighted assets (RWAs) over the outlook period from around 2 per cent as of year-end 2012.

Moody’s expects the increase in net income to provide UAE banks with the internal capital generation capacity necessary to support asset growth over the outlook period, while maintaining their strong Tier 1 capital levels, which stood at around 16 per cent as of June.

The deposit growth is also expected to remain strong and banks will continue to focus on liquidity management ahead of the implementation of Basel III liquidity ratios, said the report.

However, the exposures to large corporate restructurings and government-related issuers (GRIs) will continue to pose asset-quality risks, particularly for Dubai-based banks, it said.

Other persistent structural weaknesses, such as limited transparency, sizeable related-party lending and high loan and deposit concentrations, will also continue to leave UAE banks susceptible to single-borrower or sector-specific risks, such as real estate and construction, over the outlook horizon, it added. - TradeArabia News Service




Tags: UAE | banking | debt | system | stable | Moody's |

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