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UAE banks ready for challenges

Dubai - Industry to stabilise along with the nation's economy; capitalisation set to remain robust

The UAE banking sector's performance will see a stabilisation as the economy also does so with the recovery in crude prices and strong capitalisation of financial institutions, according to industry analysts.
"We think that 2018 will be marked by a stabilisation of the performance of UAE banks as the economy stabilises. We think that growth will remain muted as economic growth remains below the era where oil prices were at triple-digits/record highs. On asset quality, we are of the view that most of the deterioration would have been already taken into account by the beginning of 2018," says Mohamed Damak, senior director and global head of Islamic finance at Standard & Poor's.
Damak believes that the cost of risk will stabilise at a higher level.
"The main sector to watch would be the real estate sector as prices continue their decline although we are far from being in a 2007 scenario as the drop in price was controlled to a large extent," says Damak.
M.R. Raghu, managing director of Marmore Mena Intelligence, says the performance of the UAE's banking sector stabilised marginally in 2017 compared to 2016, which can be attributed to growth in the non-oil economy, improved liquidity and stable funding conditions.
However, loan performance is expected to soften modestly in 2018 due to sluggish economic growth in 2017. Also, a moderate increase in non-performing loans can be witnessed as weaker economic growth and public-sector spending in 2017 pressure the finances of borrowers.
S&P's Damak expects that the capitalisation of UAE banks, which is viewed as strong, is expected to remain at the same levels.
He noted that mergers would remain the exception rather than the norm due to the ownership structures of UAE banks.
Yet consolidation would make sense due to the overbanked nature of the UAE banking system, which leads to significant price competition.
Stuart Scoular, partner with PriceWaterhouseCoopers in the Middle East, says overall industry performance has been slightly improving with small growth in margins coming from interest rates. He said cost-to-income ratio is improving and overall seeing small increase in liquidity. He reaffirmed that the industry is overbanked in the UAE.
"If you look at UAE population, it is a certain conclusion that the industry is suffering from overbanking. Hence, there is an opportunity for bank consolidation and we do see that happening in coming years," Scoular said.
Mik Kabeya, an analyst at Moody's Investors Service, added: "The UAE banking system would see robust credit growth underpinned by strong capitalisation, stable funding and liquidity conditions."
 
Banks will pass on VAT
According to Damak, most of the VAT implementation impact will be passed to customers and that could result in an increase in the cost of banking services in the UAE. Raghu says the lack of preparedness of businesses in terms of VAT implementation is consistent across different industries and businesses - including banks.
"Ideally, it would take six months for banks to be completely ready, once detailed compliance requirement are provided. The biggest impact on banks would be that VAT is likely to be an irrecoverable cost, negatively affecting margins for the banking sector. Majority of the services provided by the banks would be exempt from VAT and banks that provide both taxable and VAT exempt services would be required to calculate how much VAT it is entitled to recover," he added.
- waheedabbas@khaleejtimes.com