S&P affirms ratings on top UAE banks, revises outlook to stable

Economic contraction in 2020 and prospects of a protracted recovery in 2021 and beyond will have varying effects on rated UAE banks

  
Image used for illustrative purpose.

Image used for illustrative purpose.

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S&P Global Ratings on Tuesday affirmed its ratings on First Abu Dhabi Bank (FAB), Abu Dhabi Commercial Bank (ADCB), Sharjah Islamic Bank (SIB), and Mashreqbank (Mashreq). The outlook for all the banks were revised to stable from negative, the ratings agency said in a note.

S&P lowered the long-term issuer credit ratings on National Bank of Fujairah (NBF) to 'BBB' from 'BBB+' and revised the outlook on the bank to stable from negative.

The sharp economic contraction in 2020--and prospects of a protracted recovery in 2021 and beyond--will have varying effects on rated UAE banks, it said in a note.

“We expect the residential real estate sector will remain under pressure for at least another year or two because of continuous oversupply, while demand-driven weaknesses will hamper the tourism, hospitality, and aviation sectors, as well as some trading sectors. We therefore expect UAE banks' asset-quality indicators will continue to deteriorate in the next 12-24 months, as regulatory forbearance measures are gradually lifted, and that credit losses will likely remain elevated.”

The agency therefore revised down its assessment of economic risk and revised the trend to stable from negative.

UAE banks' exposure to the real estate sector--about 28 percent of total loans (assuming one-third of retail loans are channeled through real estate)--relatively high average-loan-to-value ratios after limits were increased by the central bank and significant exposure to other risky sectors, such as struggling government-related entities (GREs), have contributed to the decision, the note said.

“Our estimates of risk-adjusted capitalization (RAC) among rated UAE banks have weakened commensurately but generally remain strong. We also expect banks will remain profitable with an average return on assets of 1.0 percent in 2021, despite the sharp increase in cost of risk and lower interest rates.”

For First Abu Dhabi Bank S&P has a stable outlook on the expectation that, over the next 12-24 months, the bank will contain further credit losses and problem loan accumulation while recovering profitability, thereby supporting strong capitalization and bolstering its ability to absorb losses.

S&P also expects FAB's earnings will recover relatively quickly, with new growth likely bolstered by less-risky government-related projects.

Abu Dhabi Commercial Bank has a stable outlook, which balances “our expectations that operating risks and further credit losses from weaker sectors of the UAE economy will be absorbed by ADCB's strong capital buffers and expected stable earnings performance over the next 12-24 months,” the rating agency said.

S&P has a stable outlook on Mashreq reflecting the view that the bank's business and financial profiles will remain broadly unchanged over the next 12-24 months, despite pressure on its operating environment and our expectation that asset-quality indicators will weaken slightly.

(Writing by Brinda Darasha; editing by Seban Scaria)

brinda.darasha@refinitiv.com

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