Moody’s affirms stable outlook for UAE banks on economic resilience

Moody's Investors Service has maintained a stable outlook for the United Arab Emirates’ banking sector, reflecting economic resilience, strong capitalization, and stable funding and liquidity conditions.

Profitability of UAE banks is projected to remain strong, with a net income measuring between 1.5 percent and 1.7 percent of tangible banking assets over the next 12 to 18 months.

Lower margins will be balanced by lower operating expenses and stabilizing provision charges.

"Faster economic growth in 2018 will support the banking system's credit growth, and we forecast credit growth of around 5 percent in 2018, after a forecast lower growth of around 2 percent in 2017, from 5.8 percent in 2016 and 8.0 percent in 2015" said Mik Kabeya, analyst at Moody's.

"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," he added.

Meanwhile, loan performance is likely to soften modestly following sluggish economic growth this year, with non-performing loans (NPLs) forecast to rise to 5.5 percent-6 percent of gross loans by 2018, from 5.3 percent in June 2017.

Main downside risks to loan quality are high concentrations of loans to government-related institutions and to a volatile real estate sector, the rating agency added.

However, capital levels will stay strong over the next 12 to 18 months, providing a “substantial cushion against softening loan performance,” the report said.