LONDON: Problem loans in the UAE’s banking sector are set to rise by the end of 2018, ratings agency Moody’s Investors Service warned, blaming “sluggish” economic growth seen this year.
The agency has forecast that non-performing loans could reach 5.5 or 6 percent of total gross loans next year, an increase from the 5.3 percent recorded in June 2017.
This is at the higher end of the scale when compared to the UAE’s peers in the Gulf region where non-performing loans range between 1.6 and 6.3 percent, Moody’s said in a note issued on Monday.
While Moody’s has maintained its outlook for the country’s banking sector as “stable,” the agency said a high concentration of loans to government-related institutions and to the volatile real estate sector continues to pose risks to the quality of loans in the UAE.
It also warned of the level of exposure banks have to the construction and property sectors, industries that suffer from a higher-than-average historical delinquency level. This sector represented 19 percent of the banks’ loan books as of June 2017.
This increases to 25 percent of gross loans when personal loans for business purposes are included. Moody’s estimates that a proportion of these personal loans are likely to be used for some form of real-estate-related purpose.
The agency also forecasted that delinquencies among retail and small- to medium-sized businesses (SMEs) would increase, although overall corporate loan performance would remain “resilient.”
Household loan performance would weaken due to job losses and employment uncertainty constraining the repayment capacity of borrowers, Moody’s said.
However, the agency has forecast an economic rebound in 2018, which could help the banking sector weather any worsening of their loan books.
Moody’s has forecast that non-oil economic activity will boost the UAE’s real GDP growth to 3.2 percent next year, after a forecasted slowdown to 1.1 percent in 2017 and 3 percent in 2016.
Government spending in Dubai and economic activity in trade and financial services will help drive this growth, the report said, as will the construction of large infrastructure projects ahead of the 2020 World Expo in Dubai. The recovery in oil prices during 2017 will also support government spending.
This rebound will boost credit growth in the banking sector, which is forecast to rise by 5 percent in 2018 after a predicted lower growth rate of 2 percent in 2017, the agency said.
Capital levels will also remain “strong” over the next 12 to 18 months, which will provide a “substantial cushion” against softening loan performance, said Moody’s.
The agency expects the banking sector’s funding and liquidity to remain stable over the next 12-18 months. The sector remains primarily deposit-funded, with “moderate reliance” on market funding.
“Stabilizing oil prices and international bond issuances will continue to support funding and liquidity conditions in the country, following a tightening during 2016 amid oil price weakness,” said Mik Kabeya, an analyst at Moody’s.
Banks’ profitability is likely to remain strong, the agency said, with a net income of around 1.5 to 1.7 percent of tangible banking assets over the next 12 to 18 months.
UAE problem loans to rise, Moody’s warns
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