The United Arab Emirates’ banking sector will strengthen in performance next year and remain robust in 2019 as the wider economy benefits from improved oil prices as demand improves, leading to an easing of production cuts, according to a new note by BMI Research.

It said that despite a slowdown experienced over the summer months, it expects lending by banks to pick up throughout the rest of 2017 and to strengthen further next year, stating that it is forecasting total asset growth for UAE banks of 5.2 percent during the second half of the year, and total client loans growth of 5.5 percent.

"We expect that the primary driver of credit demand over the next 12 months will be corporates and small businesses, continuing the trend seen in the previous quarter, when business lending outpaced lending to individuals," the report said.

BMI Research, which is a Fitch Group company, went on to state that demand for loans will be driven by the real estate, construction, transport and warehousing sectors, and that it envisages few problems with bank stability as non-performing loans currently stand at about 6 percent and banks remain well-capitalised.

It also added that UAE banks' exposure to risk from the ongoing stand-off with Qatar were 'limited'.

"UAE banks exposure to Qatar is small at less than 5 percent, and we do not expect that there will be a significant impact on them from the current spat," the report said.

However, it added that there was a risk regarding investor sentiment in the wider region "if the crisis entered into a prolonged stage with no resolution".

In a separate note issued on Qatar's banking sector, BMI Research stated that Qatari banks are facing increased pressure due to an "outflow of non-resident deposits", particularly from Saudis and Emiratis. It warned that further outflows were likely unless the crisis is resolved.

Despite this, it said that it expects Qatari banks to replace some of this lost business by seeking "extra-regional funding" from Asia and Europe.

A note published last Wednesday by ratings agency Moody's argued, however, that the diplomatic stand-off, which is now in its fourth month, is credit negative for the region as a whole, with banks in Qatar and Bahrain most acutely exposed.

It said that Qatari banks witnessed as much as $30 billion in capital outflows as foreign nationals and banks either withdrew deposits or reduced inter-bank lending.

Qatar's Central Bank has had to extend funding to the country's banks to the tune of $38.5 billion (which is equivalent to 23 percent of GDP) during these first two months.

"The severity of the diplomatic dispute between Gulf countries is unprecedented, which magnifies the uncertainty over the ultimate economic, fiscal and social impact on the GCC as a whole," said Steffen Dyck, a vice-president and senior credit officer at Moody's, who co-authored the report.

The report said that Bahrain was also exposed because its own rising debt and increased bond issuance by other GCC governments had increased the country's cost of financing its own debt.

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