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UAE banks well-positioned despite rise in NPLs

Dubai - Strong capital buffers, high profitability prior to Covid-19 shield UAE banks from crisis

The UAE banks are well-positioned even as bad loans rise further, thanks to strong capital buffers and high level of profitability that local lenders enjoyed prior to the outbreak of Covid-19 pandemic, say analysts.

James Swanston, economist for Mena region at Capital Economics, said the UAE banking sector’s non-performing loan (NPL) ratio hit its highest level since 2005, although banks’ high level of profitability coming into the crisis has helped to shield them so far.

“Strong capital buffers mean that they look well positioned should bad loans rise further,” he said.

Swanston said NPLs now stand at 10.6 per cent of total loans, the highest ratio since 2005. The further increase in bad loans has been broad-based across the banking sector – all of the fifteen largest banks have seen an increase in their NPL ratio since the end of 2019.

Authorities in the UAE took a host of steps to limit the fallout from the crisis on the banking sector, including halving reserve requirements ratios and allowing banks to use excess capital buffers up to Dh50 billion.

“Banks in the UAE are in a strong position to withstand further increases in non-performing loans. The banking sector’s tier 1 capital ratio actually increased over the course of last year and now stands at 16.9 per cent of risk-weighted assets, its highest since mid-2017. A rough calculation suggests that the NPL ratio would have to more than double to around 25 per cent to push banks’ tier 1 capital below regulatory minimums,” he said in the latest note on the country’s banking sector.

He pointed out that a key concern is that banks’ exposure to government-related entities (GREs) has increased in recent years.

Global ratings agency S&P on Sunday said risk-adjusted capitalisation among rated UAE banks has weakened commensurately but generally remains strong.

“We also expect banks will remain profitable, with an average return on assets of 1.0 per cent in 2021, despite the sharp increase in cost of risk and lower interest rates. The sharp economic contraction in 2020--and prospects of a protracted recovery in 2021 and beyond--will have varying effects on rated UAE banks,” said Mohamed Damak, senior director in financial services at S&P Global Ratings.

Since real estate, hospitality, tourism and aviation are expected to remain under pressure in the near future, S&P expects UAE banks’ asset-quality indicators will continue to deteriorate in the next 12-24 months, as regulatory forbearance measures are gradually lifted, and that credit losses will likely remain elevated.

— waheedabbas@khaleejtimes.com