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Moody's paints vibrant 2008 outlook for UAE banks

DUBAI — UAE banks have a stable outlook for next year due to a vibrant economy and strong growth in a business-friendly environment, according to Moody's Investors Service, a global source for credit ratings, research and risk analysis.

"Going forward, Moody's believes that the strong financial fundamentals of UAE banks and their fragmented franchises will continue to grow in the short- to medium-term as banks expand outside the UAE, pursuing geographical and revenue-stream diversification," it added.

But it stressed that the favourable economic outlook might be offset by credit risks brought about by the increasing loan portfolio of banks, it said in a Press statement yesterday.

Peter Carvalho, vice-president of Moody's, said that high oil prices, increased government spending on infrastructure, massive real estate and the vibrant stock market had "created an overwhelming appetite for credit".

While these factors have helped raise the asset and loan base of UAE banks, they could also pose various challenges, the statement said citing the severe market correction in late-2005 and early-2006 that followed the surge on stock markets in 2004 and early-2005.

"The rapid growth in loans has driven increased profitability levels while simultaneously raising banks' credit risk profiles," the statement said.

It added that a boom in initial public offering followed in 2006, boosting brokerage and capital market fee commission income before dissipating this year. It stressed, however, that UAE banks had weathered these tests.

It said the UAE banking landscape would be changed following the creation of Emirates NBD, a merger between Emirates Bank International and National Bank of Dubai, and the issuance of new licences. It added that intense competition could lead to more mergers in the banking industry.

Carvalho said the buoyant economy would encourage banks to expand even with oil and real estate price corrections and geo-political risks "looming on the horizon".

"Notwithstanding these concerns, banks' profitability is expected to grow in 2008, albeit at a slower pace than in 2007," he said. "Improved financial metrics and risk management systems coupled with good management should enable banks to withstand downturns."