Bad loans at UAE banks likely to increase once relief measures are over - S&P 

Ratings agency assigns BICRA score for local banks at par with Mexico, Philippines, Qatar 

Bundle of Arab Money.

Bundle of Arab Money.


Problem loans at banks in the UAE are likely to increase further once borrower support measures are lifted, S&P Global Ratings said on Sunday. 

The ratings agency has also given  the local banks a group “5” classification under its latest Banking Industry Country Risk Assessment (BICRA),  similar to other countries like Qatar, Mexico, Philippines, Italy, Panama, Peru, Malta, Iceland, Hungary and Bermuda. 

In its latest report, S&P said the trend in the UAE’s economic risk is stable. However, it said that the local banking system has weakening asset quality and significant exposure to risky factors, while profitability “will remain lower for longer”.  

The country’s real estate is also expected to remain under pressure for at least another 12 months due to oversupply, while the tourism, hospitality, aviation and some trading sectors will continue to be hampered by low demand. 

“The COVID-19 pandemic, lower oil prices and continued pressure on the real estate sector have increased risks for UAE banks, and we expect banking sector’s problem loans to increase further once the regulatory forbearance measures are lifted and banks start to account for the impact of the economic shock,” S&P said. 

“UAE banks’ asset-quality indicators will continue to deteriorate in the next 12-24 months, as regulatory forbearance measures are gradually lifted, and … credit losses will likely remain elevated,” S&P continued. 

Support for borrowers 

Banks in the UAE had extended relief to their customers last year to help them survive the impact of the coronavirus pandemic. Through the Targeted Economic Support Scheme (TESS), which was rolled out in March 2020, businesses were able to benefit from deferred loan repayments and interest-free financing. 

By the end of 2020, some 10,000 small and midsize businesses benefitted from the loan deferral facility, in addition to 2,000 other private companies and more than 310,000 people, according to the UAE Central Bank. 

Last November, the central bank extended the TESS deferral programme until the end of June 2021. Starting January this year, banks were also given the option to grant new loans through the TESS recovery programme. 

According to S&P, banks in the UAE still display certain strengths, which include high-income levels and strong fiscal and external position. The local economy is also “relatively” more diversified compared to its peers in the Gulf cooperation Council (GCC) region, while the bank’s funding profile is dominated by stable core deposits. 

However, it noted the asset quality is weakening and there’s significant exposure to risky sectors. The banking sector also remains fragmented with high price competition. 

The central bank had projected the UAE’s economy to rebound this year, with the non-oil gross domestic product (GD) forecast to grow by around 3.6 percent. 

(Reporting by Cleofe Maceda; editing by Seban Scaria)

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