UAE banking sector profitability to remain low for longer: S&P

Real GDP will only return to the 2019 level by 2023

  
Image used for illustrative purpose. United Arab Emirates dirham.

Image used for illustrative purpose. United Arab Emirates dirham.

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S&P Global Ratings expects UAE’s GDP growth to recover this year from the sharp recession of 2020 triggered by the COVID-19 pandemic and low oil prices.

However, the shock will continue to rock the economy and banking sector and real GDP will only return to the 2019 level by 2023, despite the expected boost to growth from the Dubai Expo this year and a recovering oil sector, the ratings agency said in a report.

“The country’s target to vaccinate 50 percent of the population by end Q1 2021 is positive, but further virus waves and mutations pose significant downside risks.”

Relatively higher exposure to sectors affected by the pandemic -- including real estate, construction, hospitality, and retail -- will result in weaker asset quality and higher credit losses for UAE banks.

“We expect banks’ asset quality to deteriorate and cost of risk to increase further as they start recognizing the impact of the 2020 shock and as the Central Bank of UAE lifts its forbearance measures progressively in H2 2021.

Lending growth is set to remain muted and corporate borrowing will likely improve only slightly “because some of the deferred capital expenditures in 2020 may be executed this year along with refinancing existing debt.”

Profitability

Given continued low interest rates, banks’ profitability will, therefore, remain low in 2021 with a few banks potentially showing losses.

As cost of risk continues to increase, “we think UAE banks’ profitability will keep declining with limited prospect of returning to historical performance over the medium term.”

This could drive banks to look at cost-reduction initiatives and even consolidation. 

Asset quality

The agency expects problem loans to increase once the central bank’s forbearance measures are lifted and banks start to account for the impact of the economic shock. “However, we expect this process to be gradual to minimize the impact on the banking system. Real estate, construction, hospitality, consumer-related sectors, and SMEs will be the chief contributors.”

The weighted average non-performing loans (Stage 3) for 10 largest UAE banks, is set to climb over 7 percent, it said.

UAE banks increased their provisions in 2020 to cover for the impact of a fraud case in one of the largest corporates and the default of some construction and other companies.

“We expect additional defaults to occur in 2021 and believe that cost of risk will increase further. Coverage ratio will remain below historical levels.”

However, strong and stable capital buffers, good funding profiles, and expected government support should continue to support banks’ creditworthiness in 2021.

Some banks may raise additional capital in the form of Tier 1 or Tier 2 instruments to benefit from supportive market conditions, the report added.

(Reporting by Brinda Darasha; editing by Daniel Luiz)

brinda.darasha@refinitiv.com 

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