Higher oil prices driven by global supply issues stemming from the military conflict between Russia and Ukraine will support UAE banks’ funding and liquidity, Moody’s Investor Service said as it raised the outlook for the banking sector.
The UAE banks have strong liquidity with liquid assets at 38 per cent of total assets as of December 2021, up from 36 per cent as of December 2020, the rating agency noted.
With operating conditions of banks in the UAE returning to normal on the back a rebound in economic activity, Moody’s has revised the outlook for the banking system to stable from negative.
Following the recent relaxation of pandemic restrictions, a strong vaccination roll-out, and a resurgence in oil prices, the economic activity saw a major bounce back to help rebuild business confidence, particularly in the large corporate segment and drive modest economic growth in the non-hydrocarbon sectors, Moody’s said.
In 2022, banks’ profitability will likely improve modestly after a 60 per cent increase in 2021, it said. “Profitability will benefit from higher interest rates, partially offset by still-substantial loan-loss provisioning. The full benefit of rising rates will be evident towards the end of the outlook period in the form of higher interest income,” said the rating agency.
However, banks face deteriorating loan quality due to the delayed effect of the pandemic shock, particularly among the smaller banks, analysts at the rating agency said.
“Profitability will remain stable and capital buffers will stay solid. Higher oil prices will support banks’ funding and liquidity. The UAE government’s willingness and capacity to support local banks if needed will remain high over the next 12 to 18 months,” said Badis Shubailat, an analyst with Moody’s.
Moody’s projected that real GDP will grow by 6.3 per cent in 2022 and 4.0 per cent in 2023, with the non-hydrocarbon economy growing by 4.4 per cent and the hydrocarbon sector by 11.4 per cent as oil production returns to pre-pandemic levels.
“The domestic economy has fully reopened in Dubai and continues to normalise in Abu Dhabi. The ongoing expansion of the services sector will drive economic growth, particularly in Dubai where tourist arrivals and hotel occupancy rates have recently soared. This has supported a rebound in property and rental prices, although the delayed Expo 2020 and the continued strength of Dubai in trade, transport, tourism and financial services have also contributed,” analysts said.
“We expect credit growth in the country to remain solid at 5.0 per cent for 2022 as credit demand from the government, businesses and individuals increases modestly,” said Moody’s.
Uncertainty around global macroeconomic conditions has increased due to the military conflict between Russia and Ukraine, but the rating agency does not expect a significant impact on UAE banks given their limited direct exposures to these two countries.
Moody’s analysts expect problem loans to rise, particularly among the smaller banks, due to the lagging effect of economic contraction in 2020. “With economic recovery underway, we also expect asset risk to increase in certain sectors such as construction, real estate, food and beverages, and other tourism-related services due to excess supply. As a result, system-wide problem loans will increase to around 7.0 per cent of total loans during 2022, from 6.4 per cent as of December 2021.”
They said ongoing loan restructurings and the gradual withdrawal of pandemic-related support packages will put further pressure on asset quality during 2022. “Strong capital provides sizeable loss-absorption potential. We expect sector-wide tangible common equity1 to remain at a robust 13-15 per cent of risk-weighted assets over the next 12 to 18 months.”
The rating agency noted that strong internal capital generation and capital retention combined with modest credit growth will support capital preservation.
“Banks are primarily deposit-funded, with only moderate recourse to confidence-sensitive capital markets funding. The combination of modest credit demand and higher deposit growth will continue to provide the banks with ample funding and support loan to deposit ratios and the overall funding profile of the banks. Profitability will improve modestly but will remain below pre-pandemic levels,” said Moody’s.
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