The international rating agency Moody’s Investor Service on Wednesday maintained its stable outlook on the banking system in the United Arab Emirates.
The Moody’s statement covered banking system’s creditworthiness over the next 12-18 months and kept its stable outlook unchanged from the 2013 stance.
Nitish Bhojnagarwala, Moody’s Assistant Vice President, said, “The outlook reflects our expectation of continued improvements in the operating environment, driven by high government spending, despite recent oil price declines, and continued recovery in core economic sectors, particularly in Dubai”.
The outlook hinted at modestly increased profitability of the UAE banking sector amid decline in problem loans. The statement added, “As a result of these improvements we expect that problem loans will decline further, profitability will increase modestly and that high liquidity and capital buffers will be maintained. These positive developments will remain balanced against downside risks of further declines in oil prices and high lending concentrations.
The problem loans have been hitting the UAE banks hard in the past few years but the Moody’s saw decrease in the non-performing loans by year-end 2015. ”By year-end 2015, we expect further declines in the problem loans to gross loans ratio to around 7 percent, from around 9 percent system average at December 2013 (around 8.7 percent as of June 2014)”.
Apart from the above-mentioned operating environment improvements; tighter underwriting during the downturn period leading to lower new problem loan formation; a reduction in the stock of problem loans from continued settlements, recoveries and commercial restructurings; and an expected loan growth of 7 percent to 10 percent would also contribute to the banking system’s strength, the Moody’s maintained.
Predicting the UAE’s GDP rate to grow up to 4 percent annually in both 2014 and 2015, the Moody’s argued that the continued public sector spending, particularly in Abu Dhabi and strong growth in Dubai’s more diversified private sector (particularly in the trade, transport and tourism sectors) will support the overall economy.
“This economic growth, combined with increasing confidence, will support credit growth of 7-10 percent annually for the banking system, while inflation levels are expected to reach the 2.5-3 percent range”, it concluded.