2021 to be 'toughest test for banks'; UAE lenders face weaker profits, asset quality

S&P also anticipates problem loans to rise amid slowdown

  
Image used for illustrative purpose. UAE Dirhams.

Image used for illustrative purpose. UAE Dirhams.

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Next year may be more challenging for banks in the UAE, as their asset quality and profitability are forecast to weaken on the back of continued slowdown in the economy and real estate sector.

Low oil prices, coupled with ongoing mitigating measures, such as the postponement of debt payments, could also result in more bad debts piling up, S&P said in its latest analysis.

“The fall in oil prices and economic slowdown will prompt a rise in problem loans and the cost of risk, at a time when the real estate sector was already under significant stress,” the ratings agency said in a report.

“Because of ongoing regulatory forbearance measures, we anticipate that non-performing loans will reach a peak in 2021,” it added.

The picture is no different in other markets. The ratings agency has predicted a more difficult year ahead for banks around the world, citing that 2021 “could turn out to be the toughest test” for lenders since the aftermath of the 2009 global financial crisis.

“This year has been hard for banks. Next year may be even harder,” S&P said.

The UAE has rolled out a series of stimulus packages and initiatives to mitigate the financial impact of the coronavirus pandemic, granting rent reprieves, deferring loan repayments and opening up interest-free credit lines to businesses and individuals.

At least 310,000 customers have so far benefited from the UAE’s loan deferment initiative since the onset of the coronavirus pandemic.

Credit losses

S&P said the relaxation of certain prudential requirements could erode banks’ strong capital buffers, and that credit losses could spike up to 200 basis points (bps), especially given that some major companies are facing some serious issues.

One of the established organisations in the UAE, Arabtec, has recently announced shareholders’ decision to dissolve the company.

“The fraud case in one large corporate and the recent liquidation of a major construction company, combined with banks’ strategies to start building additional provisions, will push credit losses to 180 bps-200 bps,” S&P said.

“Bank profitability to remain low. Margins have tightened by 30 bps-40 bps due to lower interest rates. Lower margins and higher credit losses would lead to lower profitability for UAE banks. We believe UAE banks’ reduced profitability will last longer due to the high proportion of non-interest-bearing deposits in their funding structures and lower revenue on the asset side,” it added.

(Reporting by Cleofe Maceda; editing by Seban Scaria)

Cleofe.maceda@refinitiv.com

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