Business lending recovery to strengthen UAE banks

19/09/2017 05:57 AST

The UAE banking sector is likely to strengthen this year and in 2018 on the back of increased lending to businesses, according to BMI Research, barring any fresh slump in oil prices during the period.

“Despite having slowed moderately in the past several months, we maintain our forecasts for relatively robust growth in the UAE’s banking sector in 2017, and expect that this will strengthen further in 2018,” the research firm said.

“We expect that the primary driver of credit demand over the next 12 months will be corporates and small businesses, continuing the trend seen in the previous quarter, when business lending outpaced lending to individuals.”

BMI said that it expects UAE bank assets to rise at a rate of 5.2 per cent in 2017 to Dh2.75 trillion, and by 6 per cent in 2018 to Dh2.91tn. Client deposits are likely to perform better than credit demand as higher interest rates attract savers.

UAE bank deposits rose 7.1 per cent year-on-year in July; BMI said it expects deposits to rise 8 per cent this year and 7.2 per cent in 2018.

Many businesses have taken a cautious approach to borrowing in the past couple of years in the wake of the biggest slide in oil prices in almost a decade. Signs of economic recovery this year, however, have bolstered confidence, leading to an increase in demand for credit.

BMI said that it does not expect the US Federal Reserve to raise interest rates any more this year, but that stronger economic growth in the United States will lead to a 50 basis point hike in both 2018 and 2019. The UAE central bank follows the Fed monetary policy because the UAE dirham is pegged to the US dollar.Risks to the banking sector include a deterioration in relations with Qatar. However, BMI said the UAE’s banking sector is stable enough, with non-performing loans estimated to be at a manageable level of around 6 per cent.

“We believe that the fallout of the diplomatic spat on the UAE’s banking sector will be limited, although, we acknowledge some risk if the impasse continues for far longer than the relatively rapid resolution we currently expect,” the firm said.

“The Saudi Arabian Monetary Authority reportedly advised banks in the region not to deal with Qatari banks and Qatari riyals and bankers have in the UAE have postponed deals until they receive guidance from the Central Bank of the UAE.”

The National