UAE banks on stable path: Ratings agency Fitch
Outlook for Gulf lenders, backed by sovereign support, remains stable, credit rating agency Fitch said in a latest report.
“GCC sovereigns are helping to stimulate their economies through government-sponsored infrastructure projects, taking advantage of their significant oil/gas revenues. Oil production is expected to be lower in 2013, but will, nevertheless, generate strong revenues for oil exporters, above budget requirements (except in Bahrain). Non-oil producers will, however, be at a clear disadvantage, in the absence of economic growth,” it says.
Fitch said it expects loan growth to increase in 2013, as confidence improves and infrastructure projects come on stream, stimulating the local economies, but much also depends on the global economy and regional unrest.
“Margins have been under pressure due to low interest rates and subdued volume growth. However, rising fee income, lower impairment charges and cost control should lead to a gradual improvement in profitability,” it said.
Within the GCC, Fitch believes that non-performing loans have generally peaked and expects lower impairment charges in 2013, although significant legacy problems remain, notably in the UAE and Kuwait.
“Recoverability of these loans and related collateral values will depend on market developments. Non-GCC countries may suffer problems due to continuing political uncertainty, social unrest and economic difficulties,” Philip Smith, Senior Director at Fitch Ratings, said.
UAE banking sector:
UAE banks remain profitable, despite weaker asset quality, slow loan growth and recent regulations, Fitch said.
The Central Bank of the UAE (CBUAE) has issued a number of regulations in the past year. Restrictions on retail lending (amounts, tenors and interest rate ceilings) have hindered growth in retail lending, while restrictions on loan/value ratios for residential mortgages, especially for expatriates, may limit the potential recovery in the residential market.
Limitations on exposures to GREs are intended to reduce concentration risk and should be beneficial in the longer term, but some banks will need time to comply with the regulations.
Some of these restrictions are currently under review by the CBUAE, in light of objections from the banks. In addition, the CBUAE has introduced new liquidity requirements in anticipation of Basel III, which may hinder growth in lending and profitability.
The UAE operating environment is likely to remain subdued in 2013, despite attempts by the Dubai government, in particular, to promote the local economy with announcements of new projects, Fitch said.
However, in a separate report, Moody’s Investors’ Service, said, “Although the domestic operating environment is recovering, we expect weak confidence to generate only modest overall credit growth of 4 per cent-7 per cent for 2012 and 2013 (compared to inflation in the 1.5 per cent - 1.7 per cent range).
“We also expect a continued divergence of performance within the banking system in the two core cities: with Abu Dhabi benefiting from higher public-sector spending and confidence, while Dubai’s prospects remain overshadowed by commercial real estate oversupply and the legacy asset quality challenges stemming from government-related issuers (GRIs), despite solid signs of recovery in its more diversified private sector.”
UAE banks’ profitability are expected to remain constrained by cautious loan growth and the ongoing provisioning that is required to cover elevated problem loan levels, against a background of mixed signs of a recovery. “We believe that the net profits of Dubai-based banks will remain particularly pressured, while Abu-Dhabi-based banks should see net profits improve in 2012 and 2013, with net income to average RWAs of around 2.5 per cent,” Moody’s said.
The Abu Dhabi government cut its spending on construction-related projects in 2011, owing to concerns about the significant oversupply in the real estate market, an increase in the emirate’s financial commitments and the slowdown in the global economy.
“Key projects remain in the pipeline, but some projects were postponed, as the Abu Dhabi government prioritised major infrastructure projects. Oversupply in the real estate sector as projects are completed could lead to asset quality issues,” it said.
“Significant asset quality problems remain in Dubai, primarily relating to the weak real estate sector, as well as Dubai government-related entities (GREs) and other major corporates which are undergoing restructuring.”
Last week Sharjah Islamic Bank, a relatively small lender, reported a 8.3 per cent growth in its net profits to Dh272.0 million last year, compared to 251.1 million achieved in 2011. Most banks are expected to report profits.
Core earnings have benefited from lower funding costs. However, Fitch expects that core earnings will decline considering low new business volumes.
“While impairment charges are expected to remain relatively high in 2013, not least due to relatively low loan loss reserve coverage in some cases,” Fitch said.
Customer deposits have increased and the average loans/deposits ratio has remained below 100 per cent, as loan growth has been subdued. Some banks have accessed the international debt capital markets, but this can be expensive, especially for Dubai-based banks.
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